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2014-03
Economic Freedom in the Long Run:
Evidence from OECD Countries (1850-2007)
Prados de la Escosura, Leandro
http://hdl.handle.net/10016/18434
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Working Papers in Economic History
March 2014
WP 14-02
Economic Freedom in the Long Run:
Evidence from OECD Countries (1850-2007)
Leandro Prados de la Escosura
Abstract
This paper presents historical indices for the main dimensions of
economic freedom and an aggregate index for nowadays developed
countries -(pre-1994) OECD, for short-. Economic liberty expanded
over the last one-and-a-half centuries, reaching two thirds of its
maximum possible. Its evolution has been, however, far from
linear. After a substantial improvement since mid-nineteenth
century, World War I brought a major setback. The post-war
recovery up to 1929 was followed by a dramatic decline in the
1930s and significant progress took place during the Golden Age
but fell short from the pre-World War I peak. A steady expansion
since the early 1980s has resulted in the highest levels of economic
liberty of the last two centuries. Each main dimension of economic
freedom exhibited a distinctive trend and its contribution to the
aggregate index varied over time. Nonetheless, improved property
rights provided the main contribution to the long-run advancement
of economic liberty.
Keywords: negative freedom, economic liberty, OECD
JEL Classification: N10, O17, P10
Leandro Prados de la Escosura: Departamento de Ciencias Sociales, Área de
Historia Económica e Instituciones and Instituto Figuerola de Historia y Ciencias
Sociales, Universidad Carlos III de Madrid, Calle Madrid, 126, 28903 Getafe
(Madrid), Spain, and CEPR Research Fellow.
E-mail: [email protected]
http://portal.uc3m.es/portal/page/portal/instituto_figuerola/home/staff_directory/lprados
UNIVERSIDAD CARLOS III DE MADRID  c/ Madrid 126  28903 Getafe (Spain) Tel: (34) 91 624 97 97
Site: http://portal.uc3m.es/portal/page/portal/instituto_figuerola/home/
Publisher:
Carlos III University of Madrid. Figuerola Institute of Social Sciences History
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Series:
Working Papers in Economic History
Electronic version of these working paper series available on:
http://hdl.handle.net/10016/16
This work is licensed under a Creative Commons Attribution-NonCommercialNoDerivatives 4.0 International License.
Economic Freedom in the Long Run:
Evidence from OECD Countries (1850-2007)
Leandro Prados de la Escosura
(Universidad Carlos III, LSE, and CEPR)
Economic Freedom in the Long Run:
Evidence from OECD Countries (1850-2007)1
Abstract
This paper presents historical indices for the main dimensions of economic
freedom and an aggregate index for nowadays developed countries -(pre-1994) OECD,
for short-. Economic liberty expanded over the last one-and-a-half centuries, reaching
two thirds of its maximum possible. Its evolution has been, however, far from linear.
After a substantial improvement since mid-nineteenth century, World War I brought a
major setback. The post-war recovery up to 1929 was followed by a dramatic decline
in the 1930s and significant progress took place during the Golden Age but fell short
from the pre-World War I peak. A steady expansion since the early 1980s has resulted
in the highest levels of economic liberty of the last two centuries. Each main dimension
of economic freedom exhibited a distinctive trend and its contribution to the
aggregate index varied over time. Nonetheless, improved property rights provided the
main contribution to the long-run advancement of economic liberty.
Keywords: negative freedom, economic liberty, OECD
JEL Classification: N10, O17, P10
Leandro Prados de la Escosura,
Universidad Carlos III,
Departamento de Ciencias Sociales and Instituto Figuerola,
28903 Getafe (Madrid)
[email protected]
http://www.uc3m.es/portal/pae/portal/dpto_historia_economica_inst/profesorado/leandro_prados_escosura
LSE,
Department of Economic History,
Houghton Street, London WC2A 2AE
[email protected]
1
I thank Stefano Battilossi, Forrest Capie, Francisco Comín, Pedro Fraile Balbín, James Gwartney,
Michael Huberman, Joost Jonker, Robert Lawson, Pablo Martín-Aceña, Branko Milanovic, Kevin
O’Rourke, Nuno Palma, Albrecht Ritschl, Carlos Rodríguez Braun, Blanca Sánchez-Alonso, Isabel SanzVillarroya, Antonio Tena-Junguito, and participants at Cambridge University and LSE seminars, for their
advice and comments. I am especially obliged to Amadeo Petitbò for his encouragement. Gayle Allard,
Matthias Morys, Peter Nardulli, Dennis Quinn, Jaime Reis, Max Schulze, and Jeffrey Williamson kindly
supplied me with their unpublished data. Research assistance by Juana Lamote de Grignon is most
appreciated. Financial support from Fundación Rafael del Pino and the Leverhulme Trust (VP2-2012-050
Grant) is gratefully acknowledged.
2
The current recession provides an opportunity to take stock and address issues
recurrently raised by social scientists: How has freedom evolved over time? Did all
dimensions of freedom evolve alongside? A distinction has been made between
‘negative’ freedom, defined as lack of interference or coercion by others (freedom
from), and ‘positive’ freedom, that is, the guarantee of access to markets that allow
people to control their own existence (freedom to) (Berlin, 1958).
A tension has long existed between the view that perceives the extension of
freedom as the most effective way to promote welfare and equality, and the view that
stresses welfare and equality as prerequisites of freedom (Friedman, 1962; Sen, 1988).
In the former, an increase in negative freedom will deliver more positive freedom
while, in the latter, an improvement in positive freedom will provide, by increasing
welfare, more negative freedom. It has been argued that every society faces a tradeoff between preserving individuals’ innate (negative) freedom to enhance their
wellbeing, and constraining this innate freedom so individuals, by enhancing their
positive freedom, achieve wellbeing (See Stroup, 2007). More bluntly, giving priority to
entitlements (negative freedom) may “lead to the violation of the substantive freedom
of individuals to achieve those things to which they have reason to attach great
importance” (Sen, 1999: 66), including being healthy and literate (that is, positive
freedom).
Does this trade-off apply in the long run? 2 It is my purpose to investigate
whether such a trade-off holds over time, or just during specific periods but, in order
to do so, I firstly need to construct measures of negative and positive freedoms. Since
a proxy for positive freedom, namely, a new historical index of human development, is
already available (Prados de la Escosura, 2014), I will focus on negative freedom here.
As a representation of negative freedom I have chosen economic liberty in
which competitive markets play a central role by protecting individuals “against
encroachments on the part of the police power”(von Mises, 2006) and providing
unanimity without conformity (Friedman, 1962). Personal choice, voluntary exchanges,
2
Amartya Sen’s (1999: 127) contention: “combining extensive use of markets with the development of
social opportunities can be seen as part of a still broader comprehensive approach that emphasizes
freedoms of other kinds”, can be interpreted as a negative answer.
3
access to markets, and protection of persons and their property from aggressions are
its constitutive elements (Friedman, 1962; Gwartney, Lawson, and Hall, 2013).
Research on economic liberty has been mainly restricted to the theoretical level
and only in the last decades empirical studies emerged. The expansion of quantitative
work has allowed the construction of economic freedom measures such as the Fraser
Institute and Heritage Foundation indices. These indices exhibit wide spatial coverage
but their time dimension is limited and, in the most comprehensive measure of
economic liberty (the Fraser Institute’s), only goes back to 1970. The lack of a long-run
perspective necessarily reduces the value of the lessons and policy implications
derived from them. Moreover, a risk exists of identifying what it is specific to the
recent past, with an empirical regularity that applies across space and time.
It is purpose of this paper to provide a long-run index of economic freedom.
Thus, I will construct indices for the main dimensions of economic freedom that will
be, then, combined into an aggregate Historical Index of Economic Liberty (HIEL). The
sample of countries chosen covers today’s advanced nations, more specifically, those
included in the OECD prior to its enlargement from 1994 onwards, OECD, hereafter. 3
The period considered is that of the spread of modern capitalism, namely, the epoch
covering from the emergence of free trade and laissez faire in the mid-nineteenth
century to the current recession (Williamson, 2014). During World Wars and their
aftermath data are scarcer and less reliable and, from the incomplete evidence
available, it can be suggested that economic freedom tended to be curtailed, or
suppressed altogether during in these years. Thus, the aggregate index of economic
freedom has been computed only for the periods 1850-1914, 1925-1939, and 19502007. The paper opens with a brief introduction to the concept of economic freedom
and follows with a discussion of the construction of historical indices of aggregate
economic freedom and its main dimensions. Trends in economic freedom across the
3
Pre-1994 OECD members include: Australia, Austria, Belgium, Canada, Denmark, Finland, France,
Germany, Greece, Iceland, Ireland, Italy, Japan, Luxemburg, Netherlands, New Zealand, Norway,
Portugal, Spain, Sweden, Switzerland, Turkey, the UK, and the US. Since I do not have historical data to
derived economic liberty estimates for Turkey, Iceland and Luxemburg, they are excluded from my own
version of OECD. New members since 1994 (Chile, the Czech Republic, Estonia, Hungary, Israel, Poland,
Slovak Republic, Slovenia, South Korea, and Mexico) are not considered here.
4
OECD are, then, presented on the basis of a historical index of economic liberty [HIEL].
Later, the main dimensions of economic freedom are examined and their contributions
to the historical index of economic freedom assessed. A summary of findings and a
research agenda closes the paper.
Among the main findings it can be highlighted that in the last one-and-a-half
centuries economic liberty in the OECD expanded up to three fourths of its maximum
possible, but its evolution was far from linear. World War I interrupted its substantial
improvement since mid-nineteenth century, and the post-war recovery did not sustain
its momentum collapsing during the Depression and World War II. Since the Golden
Age (1950-1973) a gradual improvement took place but only recovered its pre-1914 in
1989 to peak, then, by 2007. The different dimensions of economic liberty compose a
complex aggregate image. Improvements in property rights and contract enforcement
made the main contribution over the long run. A look at different phases shows that
the evolution of freedom of trade and factor flows led both the interwar decline and
the post-1950 recovery of economic freedom, while property rights accounted for the
expansion of economic freedom up to 1914.
Assessing Economic Freedom
A consensus about the meaning of ‘negative’ economic freedom appears as a
prerequisite for the depiction and appraisal of economic liberty. As Alfred Marshall
(1949: 8) put it,
“We need a term that does not imply any moral qualities, whether good or evil,
but which indicates the undisputed fact that modern business and industry are
characterized by more self-reliant habits, more forethought, more deliberate and free
choice. There is not any one term adequate for this purpose: but Freedom of Industry
and Enterprise, or more shortly, Economic Freedom, points in the right direction”.
The concept and measurement of economic liberty has met the reticence of
those who associate it to the Chicago School (Paldam, 2003). 4 However, it is precisely
the ideological adscription of the designers of economic freedom indices what has
4
This reticence is reinforced by the claim of a publication bias in the literature on economic freedom
and growth (Doucouliagos 2005). Interestingly, such reticence is not found when measures of positive
freedom, such as the human development index, have been produced.
5
been pointed out as a guarantee of its rigorous measurement (de Haan, Lundström,
and Sturm, 2006). Identifying ‘negative’ economic liberty with ‘market’ freedom may
be the appropriate way of making the index acceptable. 5 Thus, in the construction of a
historical index of economic liberty the focus will be on the idea of market freedom.
Aside ideological connotations, measuring economic liberty faces a serious
challenge, as a largely discretional approach is unavoidable (de Haan, 2003). Any
assessment of economic freedom would require measures based on objective
institutional rules, both formal and informal, as similar formal institutions can function
very differently depending on the cultural environment (Tabellini, 2010). However,
despite conceptual and practical difficulties assessing economic liberty provides, as
Milton Friedman pointed out, an opportunity to explore its different dimensions and to
understand its meaning (Block, 1991).
Economic Freedom Dimensions
A country will be depicted as economically free in so far privately owned
property is securely protected, contracts enforced, prices stable, barriers to trade
small, and resources mainly allocated through the market. Assessing the consistency of
a nation’s institutions and policies with these requisites is the purpose of any index of
economic freedom.
Which dimensions of freedom should be included in a historical index of
economic liberty and which proxies used for them, deserves careful consideration. In
the Fraser Institute’s (2010) Economic Freedom of the World (EFW) index -which has a
wider spatial and time coverage than the Heritage Foundation index-, five main areas
or dimensions of economic freedom are considered: size of government, legal
structure and security of property rights, sound money, freedom to trade
internationally, and regulation.6 I will examine each of them and decide on the basis of
5
In fact, during the discussions that preceded the launching of the first set of economic freedom indices
David Friedman recommended the new index to be described “as something everyone knows that
people with our political bias are in favour of, call it market freedom”(Block, 1991: 211).
6
Other depictions of economic liberty are available. For example, La Porta et al. (2004) assess economic
freedom in the mid-1990s in terms of a subjective index of security of property rights, regulation (steps
6
conceptual and practical criteria which ones to include in the Historical Index of
Economic Liberty.
In the selection of the indicators to approximate the dimensions of economic
freedom a dilemma arises between institutional (de jure) settings and outcomes (de
facto) measures (Heckelman, 2000; De Haan and Sturm, 2003). In principle,
institutional settings tend to be favoured as outcomes can be much influenced by the
government’s policy stance (Quinn and Toyoda, 2008). However, in a context of formal
and informal institutions, objective rules may not capture the institutional
environment (Woodruff, 2006). Furthermore, the degree of enforcement varies across
countries and over time. Thus, outcomes -even though they may fail to reflect the
durable rules, procedures or norms associated to the term “institutions” (Glaeser et
al., 2004)-, provide a second best solution. Besides, data constraints will force the
inclusion of both institutional and policy measures –that is, the rules and the outcomes
of the game- even in a contemporary index of economic liberty. Therefore, any
attempt to provide a long run perspective on economic liberty will definitively need to
rely on outcomes.
Once relatively uncontroversial dimensions of economic freedom are chosen,
the next stage is to compute a reduced form for each of them that it is consistent over
space and time and in which cardinal and objective indicators should be given
preference over ordinal and subjective ones. Then, a combination of the reduced
measures for each dimension into a single index of economic liberty needs to be
decided. An additional challenge is the choice of countries. A limited set of countries
for which longitudinal data of reasonable quality exists seems advisable, as country
estimates derived on the basis of heroic assumptions determine the outcome.
Following the procedure employed in the construction of the Fraser Institute’s
EFW index, when the indicator’s value is inversely related to the degree of economic
freedom (e.g., taxes on trade), it has been transformed into index form using the
expression
Iij = 10*(VMAX –Vij) /(VMAX- VMIN)
(I)
a start-up business requires to be legal and level of workers protection), and the extent of state
ownership of commercial banks.
7
Where Vij represents the value of country i indicator at year j and VMAX and
VMIN, its maximum and minimum values
Alternatively, when the value of the indicator is directly related to the value of
economic freedom (i.e., the chosen measure for property rights), it is the following
expression the one used,
Iij = 10*(VIJ –VMIN) /(VMAX- VMIN)
(II)
Thus, in either case the resulting index of economic freedom ranges between 0
(minimum) and 10 (maximum).
Let us now examine EFW’s five areas one by one and assess the available
information to construct indices for economic liberty dimensions.
Size of Government
The government, as provider of protection of the individual from coercion, is
essential for economic liberty (Friedman, 1962). Freedom of economic activity implies
“freedom under the law, not the absence of all government action” (Hayek, 1960:
193). To carry out its legitimate and limited role–which includes law and order,
defence, protection of property rights, contract enforcement, and provision of public
goods-, the government requires resources that can be acquired through taxation,
borrowing, or by issuing money. However, any government capable of these tasks is
also capable of confiscating the wealth of its citizens (Djankov et al., 2003). Thus, only
when the government is not enforcing the general law but trying to achieve some
specific purpose, economic liberty is threatened.
A widely shared view is that the more a society relies on the market, the larger
is its economic freedom. Thus, it is assumed that below a certain threshold
government spending provides public goods but, above it, distorts individual choice
(Chauffour, 2011). The insurmountable challenge is establishing a threshold below
which government’s taxation and expenditure are compatible with economic freedom
for any country at any point in time. Such difficulty explains why the share of
government in total consumption has been accepted as a short-cut on the grounds
that as it rises, public decision-making substitutes for personal choice and,
consequently, economic freedom declines (Gwartney et al., 1996).
8
However, it is the character of government action rather than the volume of its
activity what is at stake. In weak fiscal states, the inability to raise tax revenues
reduces the provision of public services, so the share of government in total
consumption remains low (Beasley et al., 2013), but this does not imply lower
government interference in individual economic decisions. Thus, “a government that is
comparatively inactive but does the wrong things may do much more to cripple the
forces of the market economy than one that is more concern with economic affairs but
confines itself to actions which assist the spontaneous forces of the economy” (Hayek,
1960: 194-195). 7
From a historical perspective, it is far from clear that countries with low
government expenditures have necessarily allocated their spending toward the
protective functions of government more efficiently than those with large ones. In
Europe, since the late eighteenth century, fiscal centralization -that allowed states to
collect larger tax revenues-, went hand-in-hand with parliamentary control of public
spending, resulting in limited government and extended economic freedom (Dincecco,
2011). Increasing government spending, meanwhile, shifted from being mainly military
to providing education and infrastructure (Cardoso and Lains, 2010). In Europe, the
government share in total consumption has increased with per capita income over the
last two centuries (Prados de la Escosura, 2007). The rationale is that, in advanced
(open access) societies, as citizenship expands, the government provides public goods
lowering the cost of market participation for individuals (North et al., 2009).
In empirical terms, the inclusion of either taxes or the relative share of public
consumption in total consumption in an index of economic freedom has been
challenged on the grounds that if the tax system was agreed upon voluntarily, the level
of taxes does not restrict freedom (de Haan and Sturm, 2000). However, it may be
objected to this argument that economic freedom is often cut down in an attempt to
7
For example, in Spain and Portugal during the central decades of the 20th century, under Franco’s and
Salazar’s dictatorships, the state interfered with the market while the share of government within total
consumption was comparatively small as social transfers were low in the absence of the welfare state
(Espuelas, 2012).
9
reduce inequality or increase wellbeing (Holcombe, 2002; Stroup, 2007; Fraile, 2011). 8
In such a case the trade off between positive and negative freedom would be
confirmed. A relevant empirical objection to the inclusion of the government share in
consumption in HIEL is that it may be redundant as other dimensions of economic
freedom already capture the potential distortion of individual choice resulting from
government restrictions.
For all these reasons I have decided to exclude the size of government (Area 1,
in the Fraser Institute’s EFW index) from the historical index of economic liberty.9
Legal Structure and Property Rights
Rule of law, security of property rights, judicial independence, and impartial
courts are major components of a legal structure consistent with economic liberty.
Unfortunately, regulatory constraints and the consistency of a country’s legal system
with economic freedom over space and time are hard to quantify.
Two indicators that aim at capturing the legal framework and the protection of
property rights from a long-run perspective can be employed. The first one is Polity
IV’s “constraint on the executive” (EXCONST), which is meant to measure the
independence of the legislature and judiciary from executive control (Marshall, Gurr,
and Jaggers, 2013). Its use rests on the assumption that constraints on the executive
percolate through to lower levels of government. The “constraint on the executive”
measure is not free from objections. For example, Glaeser et al. (2004), argue that it is
an endogenously constructed measure of political outcomes rather than of durable
institutional constraints. 10
8
Chauffour (2011) rejects the inclusion of the relative size of government as an indicator of economic
freedom because the size of government captures entitlement rights that represent ‘positive’ rather
than ‘negative’ freedom.
9
It is worth pointing out that Chauffour (2011) also excluded Area 1 from his revised version of the EFW
index. An alternative solution would be to use the deviations of the government share in total
consumption from the pattern associated both to time and per capita GDP as an indicator of restrictions
of economic freedom. However, the objections discussed above would still persist.
10
The reason for such critical assessment is that rapid changes can be observed in EXCONST without any
parallel changes in the country’s constitution (Glaeser et al., 2004).
10
EXCONST ranges from 1 to 7, with higher values corresponding to more checks
and balances on executive powers and a more accountable executive. Here I have
normalized EXCONST between 0 and 10 to make it homogeneous with the rest of the
indicators of economic liberty (See Appendix on Sources).
The second indicator is “Contract Intensive Money” (CIM), proposed as a way of
measuring compliance with contracts and the security of property rights by Clague et
al. (1999). CIM designates the percentage of deposits in money supply:
CIM = (M2 – C) / M2
(III)
Where C is currency outside banks and M2 is money supply, including currency
outside banks, current and term deposits.
The rationale that lies beneath this indicator is that when economic agents
trust that contracts will be respected and operate in an assumed safe environment,
they hold a larger proportion of their money as deposits -as it is not risky and provides
a more attractive option than cash-, so CIM tends to increase. CIM measures the
proportion of transactions that rely on third party enforcement and, hence, provides
an indicator of the security of property rights.11 A caveat is, nonetheless, necessary: in
a context of high inflation CIM may be a defective measure of contract enforcement
(Clague et al., 1999). 12
A shortcoming of CIM estimates for countries in early stages of economic
development derives from the use by the public of alternative options to deposits,
such as, for example, bills of exchange, that constituted money as economic agents
accepted them in their transactions, enlarging in practice money supply beyond legal
status money (Cuartas-Morató and Rosés, 1998; Engdahl and Ögren, 2008). In the
OECD, this problem affects mainly countries in the European Periphery during the
11
Clague et al. (1999), use factor analysis to show that for a group of institutional and financial
indicators CIM, measures of political and civil freedom, the degree of property rights’ definition, and of
the frequency of revolutions and coups d’état, have a heavier load in factor 1, while financial
development variables appear in factor 2. They, hence, conclude that CIM is mainly a measure of
property rights enforcement. For a discussion of CIM as a measure of contract enforcement in historical
perspective, see Prados de la Escosura and Sanz-Villarroya (2009).
12
As Clague et al. (1999, p. 205) stress, “inflation reduces the value of money, raises nominal interest
rates, and therefore provides an incentive to shift money from currency and noninterest-bearing
accounts into interest-paying time deposits or into foreign currency accounts. This increases CIM”.
11
second half of the nineteenth century and its consequence is possibly a downward bias
in the level of CIM. In the Netherlands, the persistence of the prolongatie - a form of
interest-bearing demand deposits backed by securities-, by providing a substitute for
demand deposits, explains its slow development in Dutch commercial banking (Jonker,
1997). As a crude correction, I have assumed a “floor” of 0.2 for CIM.13
In the construction of the transformed index, the range within which CIM
fluctuates, 1 and 0, has provided the upper and lower bounds. Then, the index has
been normalized between 0 and 10 to match the rest of the HIEL components.
A third potential indicator derives from Nardulli et al. (2013) rule of law
measures: “Legal-order” which represents “efforts to embed a law-based order in its
constitution”, and “Legal-infra”, that captures the degree to which “law has evolved
into a relevant and independent societal force”. The “Legal-order” measure does not
include countries without written constitutions, such as the UK, so just for this reason
it cannot be used here.14 In the case of “Legal-infra”, it is hard to understand why the
rule of law is weaker in Scandinavia than in Southern Europe, or, for the same token, in
capitalist than in socialist countries.15 Perhaps the fact that “Legal-infra” is proxied by
legal periodicals and legal education programmes explain such a striking result.
Therefore, I have decided not to include the “Legal-infra” into the property rights
index.
Thus, the index of economic freedom in the area of legal structure and property
rights has been obtained as the arithmetic average of the transformed indices for the
13
The countries (and years) affected by this upwards correction are: Finland (up to 1888), Italy (1869),
Japan (up to 1882), Portugal (up to 1873 and isolated episodes until 1911), Spain (up to 1880//3), and
Switzerland (up to 1854).
14
When the difference between “Legal-order” and “Legal-infra” is computed, less developed countries
in the European Periphery tend to cast positive values, while the opposite occur for the most advanced
ones. This finding may reflect the theoretical nature of the “Legal-order” measure, which receives a
relative high score in the developing countries, as opposed to the more empirical “Legal-infra” in which
its score is relative low.
15
“Legal-infra” indices show, for example, Sweden or Finland systematically below Southern European
countries. Furthermore, socialist countries, such as the Soviet Union or Cuba, are above Western
European countries in terms of both legal order and infrastructure.
12
variables EXCONST and CIM. 16 Given the way in which both EXCONST and CIM are
constructed, with higher values representing higher degrees of liberty, their values
have been transformed into index form using expression (II).
Money
A reliable and efficient monetary system is essential to protect property rights
and, hence, economic freedom. Monetary policy’s main contribution to economic
freedom is to provide a regime of stable prices that facilitates steady, non-inflationary
economic growth (Friedman, 1991). Inflation erodes the value of property held in
monetary instruments. Furthermore, high and volatile inflation rates distort relative
prices and alter long-term contracts, making difficult for individuals to plan for the
future. Consequently, when governments finance their expenditures by creating
money, it amounts to expropriating the property and, hence, violating economic
freedom (Gwartney et al., 2013).
The Fraser Institute’s measures of sound money aim at assessing the
consistency of monetary policy and institutions with long-term price stability. They
include “money growth” -measured as the differential between the average annual
growth of the money supply in the last five years and the average annual growth of
real GDP in the last ten years–, as high rates of monetary growth lead to inflation; the
inflation rate; and the standard deviation of inflation –as a measure of volatility-.
Historical evidence can be gathered to replicate these measures over the long
run. Contemporary indices of economic freedom, such as the Fraser Institute or the
Heritage Foundation’s, address, however, a context of inflationary forces, so the
possibility of deflation is not contemplated. Phases of sustained decline in the
aggregate price level were common before World War II, especially under the Gold
Standard. Although a distinction can be made between “good” deflations, that arise
from positive supply shocks associated to productivity-driven growth (such as those of
1873-1896 and 1921-1929) and “bad” deflations, associated with recessions (19191921 and 1929-1933) (Bordo and Filardo, 2005), the practical decision made here has
16
Were “Legal-infra” to be included in the aggregate index, the trend would not alter significantly
although the level would be lower.
13
been, nonetheless, to treat symmetrically the cases of deflation (or negative money
growth), and inflation (or positive money growth), as it is price stability what
guarantees economic liberty as regards sound money. 17
As the money indicators examined represent outcomes rather than institutional
constraints, the usual objection applies. Moreover, it has been argued that the three
indicators considered may be redundant (de Haan and Sturm 2000). 18
In the construction of economic liberty indices for money upper and lower
bounds have been set, following the EFW Index, at 50 and 0 rates for money growth
and for inflation (usually measured by the CPI), and 25 and 0 for the variability of
inflation (usually measured by the GDP deflator).
International Trade
Free trade represents a key dimension of economic liberty as it provides
individuals with the widest possible choice of goods and services and facilitates
specialisation along comparative advantage. By not interfering with the freedom to
enter and compete in international factor and commodity markets, governments
promote economic freedom.
In order to assess economic freedom in international trade the EFW includes a
variety of restraints: tariffs, quotas, and exchange rate and capital controls. From a
historical perspective, a distinction between the pre- and post-World War II periods
needs to be made, as differences in regime and data availability require different
indicators.
Until the Great Depression, when quotas and other non-tariff barriers were
introduced, tariffs represented the main instrument of Government interference. Let’s
briefly examine them as a potential indicator of freedom to trade.
When a nominal tariff (NT) is expressed as a proportion of the value of the
traded good, is called ad valorem.
17
I am grateful to James Gwartney and Robert Lawson for their advice on this point. For a discrepant
view, see Bagus (2003).
18
It has also been argued that inflation is a tax, so some of the objections about the use of the share of
government in total consumption as a measure of economic freedom would apply here too (de Haan
and Sturm, 2000)
14
NTij = Tij*Qij/ Pij*Qij
(IV)
Where T, P, and Q represent, respectively, the tariff, price, and quantity of the
traded good i in year j
Since this is an ex post measure, the demand of the traded good is already
affected by the tariff, and the extent to which it does is determined by its price
elasticity. If the demand of imported goods is highly elastic, the total tariff revenue
(Σ Ti*Qi) to the value of total imports (Σ Pi*Qi) ratio, that is, the so-called Weighted
Nominal Protection, [WNP], will be lower than if the demand is less elastic. Thus, WNP
will usually be a downward biased measure of restrictions to trade, in which the size of
the bias will depend on the value of the price elasticity, but also on the share of the
good within the value of total trade. Ideally, then, tariff protection should be measured
by applying the tariff rates to the composition of trade prior to the introduction of the
tariff (Tena-Junguito, 1999). Such bias may occasionally represent a serious
shortcoming of WNP. For example, during the World Wars, WNP declined in most
European countries as the increase in tariffs had a prohibitionist effect (or as imports
were forbidden altogether). This prohibitive effect has led researchers and agencies to
designing alternative measures such the “unweighted nominal protection” (UNP) in
which a simple arithmetic average of nominal protection on individual commodities is
computed (UNP= Σ Ti / Σ Pi) (Liepmann 1938). Unfortunately, historical data on this
measure is only available for a group of European countries at benchmark years over
1913-1931. 19
Lacking a better alternative, weighted nominal protection (WNP) provides a
long-run measure of restrictions on international commodity trade, especially up to
the 1930s. Hereafter, non-tariff barriers (NTB) expanded, in particular, the
manipulation of the exchange rate but, nonetheless, tariffs and NTB tend to be
correlated over the long run (Clemens and Williamson, 2004, 2012). In the EFW index,
WNP is measured as the ratio of customs revenues to the current value of imports plus
exports of goods. The inclusion of exports in the denominator allows for the fact that
19
Of the OECD countries considered here, Liepmann (1938) only provides what he labelled “potential
tariff levels” (that is, unweighted nominal protection) for nine of them (Austria, Belgium, Denmark,
Finland, France, Germany, Italy, Sweden, and Switzerland) at the years 1913, 1927, and 1931.
Alternatively, estimates of effective protection, if available, would be a better option.
15
some countries also tax exports reducing, hence, the freedom to trade internationally.
Nonetheless, the results of computing WNP with and without exports in the
denominator are closely correlated. Given data restrictions, I have chosen to stick here
to the conventional measure, that is, the ratio of customs revenues to the current
value of imports. 20
It is worth noting that WNP is an indicator of restrictions to commodity trade
and leaves aside international flows of capital and labour, so an additional measure of
free mobility of factors is needed.
Choosing freely where to live is a basic right of human beings so, from a global
and long run perspective, restrictions to international labour mobility constitute an
important constraint on economic liberty (von Mises, 1978; Pritchett, 2006; Clemens,
2011). Unfortunately, measures of international mobility of labour capturing
institutional settings are only available for a few countries (Timmer and Williamson,
1998; Sánchez-Alonso, 2013). 21 Alternatively, migration rates could be suggested as an
outcome measure but, since in addition to institutional constraints they capture many
other elements (demographic patterns, international economic conditions, etc.), a
distorted picture of economic freedom would emerge from its use. Moreover, the
possibility exists of an integrated international labour or capital market with hardly any
geographical mobility of workers or capital flows (Obstfeld and Taylor, 2004).
Fortunately, international evidence on monetary regimes and the exchange
rate facilitated the construction of an index of capital mobility that captures
institutional settings prior to 1950. I have assigned over a 0-10 range to each country
depending on its currency convertibility. Alas the values assigned in this exploratory
exercise are largely discretional. Thus, before 1914, a value of 10 has been assigned to
20
In the case of countries that belong to the European Union (or to its customs union forerunners), since
tariffs are collected at supra national level, their WNP level has been derived by projecting forward the
figure for the last available year with the average WNP for the whole area. Clemens and Williamson
(2004) opted alternatively for applying the ratio of import duties to the value of imports for the entire
EU to each member country starting from the year it joined the European Union.
21
Timmer and Williamson (1998) provide indices for only four OECD countries (Australia, Canada, the
U.S.A., and the U.K.) plus Argentina and Brazil between mid-nineteenth century and 1930. The
discretional nature of these indices is highlighted by Sánchez-Alonso (2013).
16
those countries in the Gold Standard. For countries that did not belong to the Gold
Standard, with convertible currencies or bimetallic standards, as well as for those
shadowing the Gold Standard, an initial value of 8 has been set. 22 However, each
country’s value deviates from the initial level on the basis of its exchange rate volatility
(ERV) against the Sterling (Table 1). 23
Table 1
Assigned Capital Mobility Values to Degrees of Exchange Rate Volatility before 1914
Exchange
Rate
Volatility
< 0.05
<0.1 >0.05
<0.2 >0.1
<0.3 >0.2
<0.4 >0.3
Capital
Mobility
Value
8
7
6
5
4
In the Interwar years (defined here as the period 1925-1939), before the
reintroduction of the Gold Standard as a Gold Exchange Standard, a value of 5 was
attributed to the following countries: Belgium, Denmark, Greece, and Italy during
1925-26; France, Ireland, Norway, and Portugal over 1925-28; Japan (1925-29), and
Spain (1925-30). Countries in the Gold Exchange Standard were assigned a value of 8,
lower than prior to 1914, as the international capital market was subjected to major
dislocations and capital flows tapered in the 1920s and, especially, during the
Depression (Eichengreen, 1992; Obstfeld and Taylor, 2004).
Then, after the convertibility into gold was suspended in the UK (1931), a value
of 5 has been assigned to those countries whose currency was pegged to the Sterling.
Thus, it applied Australia, New Zealand, Canada, Ireland, Portugal, Norway, Sweden,
and Greece (after 1936). In the case of France, after the Gold Standard was abandoned
22
This allows for the fact that a country could be on/off the gold standard and have open/close capital
account. I owe this remark to Kevin O’Rourke.
23
Data come from Flandreau and Zumer (2004) who described this measure as an index of vulnerability:
I replicated the index for missing dates and countries on the basis of the information in Bordo and
Schwartz (1996), Eichengreen (1992), Eichengreen and Flandreau (1996), the League of Nations (various
years), and Reinhart and Rogoff (2003, 2004, 2010).
17
(1936), the value attributed to the Franc was also 5 and this also extended to those
currencies in the “gold bloc” (Belgium, the Netherlands, Switzerland, Italy). In those
cases in which exchange control was introduced but the currency was still pegged to
the Sterling or French Franc, the value was reduced to 3. These were the cases of
Austria, Belgium (1935), Denmark, and Finland (after 1934), Japan, New Zealand
(1939). When in addition to exchange controls there were multiple exchange rates, the
attributed value was 1 (Germany since 1932, Austria since 1938, Italy since 1937), and,
in the case of Spain, a value of 0 was assigned since mid-1936, when its civil war
started.
As for the post-1950 period, Quinn and Toyoda (2008) provide institutional
settings measures of openness to capital flows that ranges from 0 to 100 and has been
normalized to a 0-10 range in order to match HIEL components. This way I was able to
complete an index of freedom of capital mobility.
Thus, an aggregate measure of freedom to trade internationally has been
obtained as the unweighted average of the transformed indices derived from WNP and
capital mobility measures for the entire period 1850-2007.
However, additional information is available for the post-1950 that allows us to
construct a more precise measure of freedom to trade internationally. Quinn and
Toyoda (2008) provide institutional settings measures of liberalization of financial
current account restrictions. 24 Another measure of institutional constraints to
international trade, the Black Market Premium (BMP) -defined as the difference (in
logs) between the parallel, market-determined and official exchange rates-, can be also
computed.25 On the basis of the average of these two indicators plus WNP and capital
24
Data of measures capturing institutional settings of openness to capital flows and international trade
of goods and services over 1950-2004 have been kindly provided by Dennis Quinn. I have provisionally
assumed that country’s levels for 2004 remained unaltered until 2007.
25
The Black Market Premium has been constructed from data in Reinhart and Rogoff (2003, 2004). In
the case of Spain the BMP is trade-weighted and derived from Prados de la Escosura et al. (2012) in
which a detailed explanation of this choice is offered.
18
mobility an index of freedom to trade internationally have been constructed since
1950.26
As the measures of capital mobility and financial current account restrictions
range between 0 and 10, these values have been used as lower and upper bound to
derive the freedom indices with expression (II). In the cases of the freedom indices
derived from WNP and BMP, expression (I) has been employed and the upper and
lower bound set at 50 and 0 per cent, respectively.
The resulting two indices of freedom to trade internationally have been spliced,
accepting the one on the basis of WNP and capital mobility for the period considered,
1850-1950, and the more comprehensive, including also current account restrictions
and BMP, for the post-1950 era.
Regulation
Regulations of economic activities can restrict market freedom entry by
interfering with individuals’ decision to engage in voluntary exchange.
Historical indicators of regulation in the credit market can be constructed. For
example, a measure of the regulation of the private sector credit that aims to capture
the extent or, more precisely, the risk of crowding out. 27 In the Fraser Institute’s EFW it
is approximated by the ratio of the government fiscal deficit to gross domestic
investment.28 However, while the relative size of investment (% GDP) increases over
time and along per capita income (Prados de la Escosura, 2007), this is not necessarily
the case with the budget deficit. The implication is that such an indicator may provide
a downward biased measure of economic freedom over time, as the denominator
would have a tendency to increase as time goes by. Therefore, I have decided to use,
26
Until 2011, the EFW index included the size of trade sector relative to its expected size of the trade
sector based on the population and geographic size of the country and its location relative to the
concentration of world GDP. As it has been accepted that this indicator captures, aside from institutional
restrictions to commerce, many other determinants of a country’s relative trade size, it has been
excluded from the EFW since 2012 (Gwartney et al., 2012).
27
In fact, if negative government saving is offset by an increase in foreign investment no crowding out
would take place.
28
In the construction of the EFW index the discussion refers to measuring the ratio of the public deficit
to gross domestic saving but it is actually measured in terms of gross domestic investment.
19
instead, the ratio of the budget balance to GDP, as it would mitigate the bias. The
index has been computed with expression (I) and adopting 5 and -20 per cent as
maximum and minimum goalposts.
Another measure of credit market regulation is interest rate control that can be
approximated in the long run by real short-term interest rates (that, is nominal shortterm interest rate less inflation). In the case of the EFW index, this measure is
constructed on the basis of rating intervals in which countries are graded depending
on the extent to which the market determined interest rates, monetary policy was
stable, and real deposit and lending rates were positive. In the case of the historical
index, though, I have preferred a cardinal rather than an ordinal approach and I
constructed an index in which the real interest rate has been transformed using upper
and lower bounds (5 and -20 per cent). It is worth noting that in the computation of
real interest rates, negative rates of inflation have been previously made equal to zero.
Without this transformation, the resulting real interest rates in periods of deflation
would exaggerate the measure of freedom from credit regulation. This decision is
consistent with the view that it is price stability what guarantees economic freedom.
An index of credit market regulation has been obtained as the unweighted
arithmetic average of the indices derived from the ratio of the budget balance to GDP
and the real interest rate.
An important facet of regulation of economic activity is, at least since midtwentieth century, that of the labour market. Employment protection, which expanded
with the welfare state, faces a dilemma between flexibility and security: maintaining a
well-functioning and flexible labour market while protecting workers against risks.
Thus, for example, long-term contracts would, on the one hand, favour on-the-job
training but may, on the other, discriminate against those workers on temporary
contracts, reducing firms’ ability to adjust to market changes (OECD, 2004). 29
Since the concern here is about negative freedom, the focus will be on the
impact of employment protection legislation (EPL) on labour market flexibility. Laws
and regulations affecting wages and working conditions may restrict negative
29
A case in point would be minimum wage legislation, which by raising wages of low-skilled workers
above market rates may lead to the substitution of capital for labour causing unemployment (DiLorenzo,
1992).
20
economic liberty. OECD (2008) has computed EPL indicators that aim at capturing the
cost implications of labour market regulation, a view consistent with the notion that
regulating workers’ protection is an additional labour cost for firms.30 The resulting
aggregate index of employment protection legislation provides an adequate measure
of restrictions to ‘negative’ economic freedom in the labour market over the period
1985-2008 (OECD 2008). Nicholas Crafts (2006) extended the index back to 1960 and I
projected it backwards to 1950 using Gayle Allard’s (2005) estimates.31 I have
normalized the index between 0 and 10 in order to keep consistency with the rest of
economic liberty measures.
As regards the pre-1950 era, Michael Huberman and his associates have
constructed indices of labour market regulation for pre-World War I Europe and the
Western Offshoots at benchmark years (1870, 1900, and 1914) (Huberman and
Lwechuk, 2003, Huberman and Meissner, 2007).32 The range of variation of
Huberman’s index over 1870-1913 is very wide, even though labour regulation was
very low compared to that of the late twentieth century, and this makes comparisons
between the two periods difficult. Besides, I have been unable to find or to construct
measures of institutional settings in the labour market for the first half of the
twentieth century.
Therefore, I have decided to restrict the coverage of the index of freedom from
labour market regulation to the post-1950 era, which actually is the most relevant
from the point of view of constraints on economic freedom.
30
Main components of economic freedom in the area of labour market regulation are, according to the
Fraser Index: hiring regulations and minimum wage, hiring and firing regulations, centralized collective
bargaining, hours regulations, mandated cost of worker dismissal, and military conscription (Gwartney
et al., 2013)
31
Since Crafts’ indices are provided at period averages (1960-64, 1965-72, 1973-79, 1980-87), and I
needed yearly figures, these average values have been assigned to each year of each period. Allard’s
(2005) index covers the period 1950-2003, so, alternatively, her estimates could be used over 19501985. I have opted out here for the one constructed by Crafts, on the basis of Nickell’s data, for 19601985.
32
The Western Offshoots only include Australia, Canada, and the U.S. Huberman and Lwechuk (2003)
also computed indices of social protection that combined with the labour regulation indices resulted in
what they labelled “labour compact” indices.
21
Thus, the index of freedom from regulation corresponds to the index of credit
regulation between 1850 and 1950 while, from 1950 onwards, has been derived as an
unweighted arithmetic average of the indices of credit and labour market regulation.
Trends in Economic Liberty Dimensions
So far, different dimensions of economic freedom have been considered,
indicators to capture their evolution, assessed, and indices for four of them
constructed (Table 2). Let us look now at their trends.
Table 2
Dimensions of the Historical Index of Economic Liberty (HIEL) and its Components
Legal Structure and
Property Rights
Money
International Trade
Regulation
Contract-Intensive
Money
Constraints on the
Executive
Inflation
Rate
Inflation
Variability
Money
growth
Nominal Weighted
Protection
Capital Mobility
Budget Balance
(% GDP)
Real Interest Rate
Current Account
Restrictions, 1950-2007
Black Market Premium,
1950-2007
Employment Protection
Legislation, 1950-2007
In the evolution of the “legal structure and property rights” dimension of
economic freedom, a sustained improvement is observed over the long run,
punctuated by the World Wars, with post-war recoveries and a severe contraction in
the 1930s (Figure 1). The distinctive behaviour of countries in terms of constraints on
government and contract enforcement is captured by the variance of economic liberty
(Figure 2). It can be observed a reduction of the dispersion up to 1914, which reversed
in the interwar years, and, after stabilizing during the Golden Age, fell again since the
late 1970s.
The performance of the “money” dimension shows a sustained improvement to
1880, followed by stability up to 1914. After an incomplete recovery during the
Interwar, it was only between the mid-1950s and 1970 when the pre-1914 level was
reached. Then, it collapsed in the 1970s, recovering its pre-World War I level in the
late-1990s and peaking by 2007. The variance is informative about the extent to which
22
monetary policies are correlated across countries. Such was the case from the 1860s
until the eve of World War I, between 1929 and 1936, in the Golden Age, and from the
early 1990s onwards, as shown by its low dispersion, while episodes of high dispersion
in the aftermath of world wars and during the 1850s, the late 1930s and the 1970s oil
shocks, evidence substantial discrepancies.
The “trade” dimension presents a very different evolution over the long run. Its
main feature is that the peak reached by 1914, after a steady increase since midnineteenth century, was not overcome until the end of the 1980s, despite recovery
episodes in the late 1920s, the Golden Age, and the 1970s. The variance of freedom to
trade internationally shows low dispersion during phases of liberalization and
increasing divergence when restrictions to liberty occurred, especially between the
early 1930s and the 1960s.
Lastly, the “regulation” dimension shows gains up to 1880 and stabilisation in a
high plateau until 1914, whose level was recovered in the late 1920s, before collapsing
after the Great Depression. The post-1950 recovery never reached pre-World War I
levels and, by the mid-2000s, freedom from regulation was similar to that of 1870. The
behaviour of freedom from regulation differs, thus, from other dimensions of
economic liberty and this is largely due to the increasing regulation of the labour
market during the second half of the twentieth century. The dispersion of freedom
from regulation is only low in the late nineteenth and early twentieth century. The
large variance in the late twentieth century points to discrepancies between countries
with credit and labour markets heavily regulated (i.e., Spain), and those in which
advances in deregulation were taking place (i.e., the U.K.).
To sum up, the distinctive trends exhibited by the four dimensions of economic
freedom, highly coincidental for unweighted and population-weighted averages,
compose a complex image of that unobservable variable, economic liberty. 33 Similar
trends, but of different intensity, are shared by these dimensions up to World War I, in
the interwar years and, again, since the late 1970s, but not during the Golden Age.
Hence, the evolution of its main dimensions does not provide a clear-cut view of
33
For population-weighted averages and its coefficient of variation, see the Appendix, Figures A.1 and
A.2
23
economic liberty’s long-run performance. Ascertaining how much progress has
economic liberty achieved over time and how much has each contributed to it
provides our next challenge.
An Aggregate Index of Economic Liberty
A dilemma emerges at this point: as each dimension of economic freedom
stands on its own, should they be considered individually, or merged into an aggregate
index? On the one hand, a “dashboard” of indicators allow us to observe the extent to
which the different dimensions of economic liberty evolve along side over time. On the
other, an inclination exists to collapse all the information into a synthetic index of
economic liberty, precluding contradictory trends between its different dimensions.34
Development economists tend to favour a “dashboard” strategy, as it stresses
multidimensionality. This approach avoids the risks involved in aggregating different
dimensions of wide and often elusive concepts, such as liberty or well-being, into a
composite index which may blur the meaning of what is really measured (Berggren,
2003). However, by collapsing different indicators into a single scalar, measurement
errors in its components can be mitigated, so the aggregate index becomes more
informative about the unobservable variable, say, economic liberty, than its
components taken individually (Haan et al., 2006).
Recently, Martin Ravallion (2012) depicted the Fraser and Heritage indices of
economic freedom, along measures of wellbeing such as the human development
index, as “mashup” indices. One of the features of a mashup index is that little or no
(economic) theory underlies it, whose components are discretionally assembled, with
the only restriction of their availability. 35
In the case of the historical index of economic liberty there is a theoretical
underpinning for the choice of each of its dimensions and, as previously discussed, an
economic rationale has been provided for the construction of its indices. Hence, the
depiction of mashup index does not seem warranted in this case.
34
As shown by the widespread practice of summarizing performance into a single scalar shows (i.e., GDP
per head, HDI).
35
How robust are the resulting country rankings to alternative specifications and, especially, what are
the implicit trade-offs involved between the variables, are Ravallion’s (2012) main concern.
24
Another issue derives from the number of elements in each dimension index. If
the number varies from one dimension to another, the implicit weights assigned to
these elements also differ, being inversely related to their number (Heckelman and
Stroup, 2005). It can be argued, though, that researchers’ priority is to get the most
accurate representation for each dimension at each point in time and, in order to do
so, they need to make the most of the available evidence. Moreover, this objection is
hardly avoidable from a long run perspective since each period requires different
measures (for example, restrictions to international trade adopt different forms over
time and, hence, different metrics are needed).
In the short history of economic freedom indices, different weighting
procedures have been explored without fully satisfactory results (Heckelman and
Stroup, 2005). Initially, the Fraser Institute published EFW indices that were
constructed using alternatively: a) equal weights for each attribute or dimension; b)
weights equal to the inverse of the component’s standard deviation; and c) on the
basis of a survey among experts (Gwartney et al., 1996). Later, it was considered that
since the indices for each dimension provided information on a latent variable,
unobservable economic liberty, obtaining the values of the parameters in the
relationship between the latent variable and the indices for these dimensions
appeared crucial (de Haan et al., 2006). 36 Thus, weights to aggregating the dimensions
into an overall index were derived with Principal Components Analysis (PCA), and,
more specifically, from the values of the first principal component’ loadings (Gwartney
and Lawson, 2000; Caudill et al., 2000). 37 The use of PCA has received strong criticism
on the grounds that it fails to provide an intuitive link between the choice of the
different dimensions of economic freedom to be added up and the value of the
36
In their pioneering work, Scully and Slottje (1991, 1992) three approaches had been used: a) equally
weighting each attribute, so it is implicitly assumed that they are of equal preference in a citizen's utility
function; principal components analysis; and employing an instrumental variable or hedonic approach.
37
PCA combines a set of variables reducing them to a few orthogonal elements that explain in a single
index the largest percentage of the variation in the data, without imposing a specific structure on the
model. Alternatively, other scholars re-built the Fraser index using absolute value of the first principal
components. About the use of actual and modified (absolute) value of the first principal components,
see Heckelman and Stroup (2005).
25
aggregate index (Heckelman and Stroup, 2005). Thus, since 2002, the decision was
taken that all dimensions would be weighted equally in the EFW index (Gwartney and
Lawson 2002).
Recently, an endogenous index of economic freedom has been constructed in
which its dimensions’ weights ultimately derive from its econometric association with
real GDP per head (Kešeljević and Spruk, 2013). 38 This approach assumes that, since
the association between each dimension of economic freedom and GDP per head
differs, the weight of each dimension in the aggregate index of economic freedom
ought to be different. However, economic freedom has an inherent value, which in no
circumstance is acquired through its association with per capita income. In fact, the
Kešeljević-Spruk approach defeats its own purpose as it makes the index of economic
liberty dependent on per capita income and, hence, precludes exploring the
relationship between these two variables.39 Valuing all dimensions of economic
freedom alike, as the EFW index does, amounts to an agnostic recognition of the
difficulty to apprehend such an unobservable variable as economic liberty.
Thus, I have opted for a composite historical index of economic liberty (HIEL)
that aims at capturing unobserved economic freedom as an unweighted additive
combination of its four dimensions (property rights, money, international trade, and
regulation). 40 Thus,
HIEL = (IEL property rights + IEL money + IEL trade + IEL regulation) / 4
(V)
which ranges between 0 and 10.
How robust are the resulting trends in economic freedom to alternative
weighting procedures is a legitimate question. Thus, as a sensitivity test, I have
computed, using PCA, alternative weights for each of the three main phases, 18501913, 1913-1938, and 1950-2007, as it could be argued that dimensions’ weights do
38
The authors employ the IV-2SLS panel data estimation methodology to a panel of 135 countries over
1996-2011. Scully and Slottje (1991, 1992) pioneered the instrumental variable or hedonic approach.
39
Naturally, a rather different issue is whether each dimension of economic freedom may have a
distinctive relationship with growth, so a disaggregated approach in the econometric research of the
economic freedom-growth connections may be advisable.
40
Alternatively, a geometric average could be used but, since there is no reason to reduce the
substitutability of each dimension of economic freedom, this approach has been discarded.
26
not remain constant over time, as well as for the whole time span, 1850-2007. The
weights for each dimension, derived from the eigenvectors or loadings of the first
principal component (that accounts for almost half of the variance) are provided in
Table 3. It can be observed that the resulting weights are not far from the equal
weights suggested by the agnostic approach.
Table 3
Dimension’s Weights derived from the First Principal Component’s Loadings
Property Rights
Money
International Trade
Regulation
1850-1914
0.27
0.28
0.22
0.24
1925-1939
0.24
0.26
0.21
0.29
1950-2007
0.27
0.26
0.31
0.16
1850-2007
0.19
0.30
0.27
0.25
Source: Appendix
A long run view of the evolution of economic liberty in the OECD can be derived
as an average of countries’ levels. In Figure 3a trends are obtained on the bases of the
unweighted averages for four different country samples (including 21, 20, 18, and 14
countries, respectively) that, as expected, reduce their spatial coverage as we moved
back in time. All country samples present, however, the same evolution over the long
run.41 Moreover, when a population-weighted aggregate index is computed for each
country sample, the resulting indices of economic liberty are also highly coincidental
(Figure 3b). Thus, for the sake of clarity, I am using a single spliced index of economic
freedom throughout the rest of the paper (Figure 4). A necessary caveat is that since
national economic policies and institutions matter for a country’s economic freedom,
unweighted averages for OECD countries seem conceptually preferable.
However, before proceeding with the analysis of the results, it seems germane
to compare, as a sensitivity test, the post-1950 HIEL, -that adds new variables to the
indices of freedom in the areas of international trade and regulation (see Table 2)-, and
the reduced index (RIEL), constructed on the basis of a common set of indicators
41
As stressed in the introduction of the paper, since comprehensive and reliable estimates for each
dimension of economic freedom are not available for the World Wars and their aftermath, the coverage
of the estimates is restricted to three periods, 1850-1913, 1925-1939, and 1950-2007 in all tables and
figures.
27
throughout the entire period, 1850-2007. It can be observed that differences are only
noticeable since 1980, when the reduced index of economic freedom exhibits higher
values (Figure 5). This discrepancy mainly derives from the inclusion in HIEL of the
index of employment protection legislation (EPL) as a measure of regulation in the
labour market.
Another relevant comparison to be made is between the indices of economic
liberty derived alternatively by weighting all dimensions equally, or by employing PCA
first principal component’s loadings as weights for either the entire time span
considered, 1850-2007, or for each of the periods distinguished: 1850-1914, 19251939, and 1950-2007 (Table 3). When fixed PCA-weights are employed throughout
1850-2007 (last column in Table 3), the resulting index matches closely the one derived
through the unweighted arithmetic average of the dimensions’ indices, except for the
pre-World War I phase, when the PCA-weighted index appears higher (Figure 6). The
reason is the larger weight assigned to the area of international trade, in which
economic freedom expanded significantly up to 1914, without being offset by the
lower weight received by property rights, another dimension in which economic
freedom thrived during this period. If, alternatively, different PCA-weights are used for
each of the three main phases, it can be observed how closely the resulting index
matches the equally weighted index, with the PCA-weighted index only exhibiting
higher levels since the late 1970s (Figure 6). The explanation is found in the area of
regulation, as its weight for 1950-2007 is lower when first principal component’s
loadings are used (19 per cent against 25 per cent in the arithmetic average index).
Thus, for the sake of simplicity in the presentation of the results, and given its
intermediate position between the PCA-weighted indices, an unweighted arithmetic
average of each dimension indices seems the best choice to derive a historical index of
economic liberty.
How does the historical index of economic liberty (HIEL) compare to the Fraser
Institute’s Economic Freedom of the World (EFW) index, built on the basis of a much
more comprehensive database, for the OECD country sample? Since HIEL includes only
four of the five areas in the EFW, it seems fair to restrict the comparison to these four
dimensions, excluding the size of government, that is, EFW4. Contrasting HIEL -a
28
reduced index that incorporates up to 12 indicators- with EFW4 -that includes 37
variables- provides a crosscheck on its accuracy.
Figure 8a shows how close a fit casts regressing HIEL over EFW4. Moreover, the
(unweighted) historical estimates, HIEL, matches Fraser Institute’s EFW4 at different
benchmarks between 1970 and 2007. Their unweighted average for OECD countries
exhibit similar trends, but levels are systematically lower for EFW4 (Figure 8b).
A glance at HIEL and EFW4 country ranking (Appendix, Table A.2) shows a high
correlation at each benchmark over the last four decades, although declining in recent
years, as countries’ economic freedom levels converge in HIEL and, consequently, its
variance drops. Country positions at the top and bottom of the ranking are rather
stable and coincidental. It can, then, be concluded that the new historical index
matches closely the Fraser Institute’s EFW4.
Trends in Economic Freedom
Economic liberty (either unweighted or population–weighted) is higher
nowadays in the OECD than at any time over the last one and a half centuries and,
probably, in history, but its evolution has been far from linear (Table 4 and Figure 4). In
the discussion of the estimates five-year averages have been used to mitigate the
volatility of the annual indices of economic liberty, largely a result of using outcomes,
rather than institutional settings, in its construction.
But by how much did economic liberty improve over the long run? Given the
bounded nature of the index, the use of conventional procedures to summarize its
evolution -say, the percentage change or the logarithmic rate of growth-, would be
misleading as increases achieved at low levels cannot be matched at high levels. It is
preferable, therefore, to consider the absolute shortfall of actual economic freedom
from the upper bound (a value of 10) at the initial point in time and, then, computing
the relative decline in the shortfall over a given period (Sen, 1981). Thus, the
improvement achieved in economic liberty is measured as the proportion of the
maximum possible. This means that between 1850/4 and 2005/7, the initial gap with
respect to the maximum potential level, 3.3 points (3.1 for the population-weighted
index), was cut down to 0.9 points for the unweighted estimates (0.8 points for the
29
weighted estimates). Thus, over the one and a half centuries considered, the shortfall
declined by nearly three-fourths [(3.3-0.9)/3.3 =0.73] (Table 4).
Different phases can be established over the long run. From the mid-nineteenth
century to the eve of World War I steady advancement of economic liberty took place
across the board in the OECD, peaking in 1913. On average, the shortfall shrank to less
than half between 1850/4 and 1910/4 (Table 4). Such a result implies that over threefourths of the overall progress in economic liberty in the OECD up to 2007 had been
achieved before World War I. Two sub-periods can be distinguished in the pre-World
War I period, with the early 1880s as the turning point. It is in the first one when most
of the action takes place and the shortfall was reduced to around half, which implies
that two-thirds of the long-term gains in economic liberty were already attained by the
early 1880s.
During the first half of the twentieth century economic freedom suffered a
severe setback. After a dramatic decline during the war and its aftermath, its level in
the first “normal” year, 1925, was similar to that of the mid-1870s. Nonetheless, the
recovery was fast and peaked by 1929, when the level of the late 1890s was reached.
The Great Depression pushed down economic freedom to the level of 1870. The
economic recovery from the Depression did not imply a rebound of economic liberty.
On the contrary, by the eve of World War II economic freedom had shrunk to the level
of the early 1850s.
Economic freedom expanded in the second half of the twentieth century and
peaked at the beginning of the twentieth-first century. However, in between two
expansionary phases (the 1950s and, especially, the post-1980 period), economic
freedom came to a halt. A quick recovery in the 1950s, after another deep contraction
during World War II, stabilised during the 1960s around the late 1920s level (and
above it, around the 1900 level, for the weighted index). A new contraction in
economic freedom in the early 1970s, coinciding with the end of the Bretton Woods
system and the oil shock, pushed economic freedom back to mid-1950s levels. A long
swing opened up in the early 1980s, in which economic freedom expanded until the
eve of the current recession, reaching the 1913 peak by 1989, with the early 1980s
shortfall reduced to half by the mid-2000s (by 40.5 per cent for the weighted index).
30
Thus, in the last two decades the highest levels of economic freedom have been
reached.
But how representative are these results? The aggregate trends discussed so
far are the result of combining the evolution of different countries over a long time
span and may conceal major discrepancies among them. A simple metric, such as the
coefficient of variation, suffices to answer this concern (Figure 7). A sustained process
of convergence in economic freedom levels is observed up the eve of World War I, in
which the rapid decline in dispersion was punctuated by reversal episodes associated
to international economic crisis. Post-World War I dispersion declined sharply until
1932, but never shrank below the level of the early 1890s. It was after the Great
Depression when divergence peaked. Discrepant recovery strategies may arguably
explain it. Interestingly, the dispersion of the late 1930s persisted during the early
1950s and remained high during the Golden Age. After another divergence episode as
a result of the oil shocks, the dispersion declined steadily since the late 1970s, with a
rebound at the beginnings of the 1980s, to reach the lowest level ever in the mid2000s. All in all, and despite severe setbacks in the interwar and early post-WWII era,
convergence in economic liberty has taken place across OECD countries during the last
hundred and sixty years.
To what extent do the results for OECD countries capture global trends in
economic freedom? The fact that, at practically any time since the mid-nineteenth
century, OECD countries represent over half of world GDP, even though a smaller
share of population, suggests that the trends presented here provide plausible
hypotheses about the evolution of economic freedom at a world scale.42
Country rankings are provided in Table 5. It can be observed how the stable
positions have been. Up to World War I, Belgium, New Zealand, and, especially, the
United Kingdom, dominated the top quartile. In the Interwar, Sweden appears at the
top position, followed by, Canada, the U.S., Netherlands, and Switzerland. Then,
between 1950 and 2007, three countries remained in the upper quartile: the U.S. always at the top position-, Canada, and Switzerland. As regards the bottom,
42
OECD represented around one-fourth of world population until mid-twentieth century, shrinking
thereafter to only 15 per cent by 2007.
31
persistence is stronger. Portugal and Finland, followed by Greece, Spain, and Italy, are
the most regular members of the lower quartile during 1850-1914. Then, Portugal,
Spain, and Italy were joined at the lower quartile by Austria, and Germany in the
interwar years. During the last phase, 1950-2007, Portugal and Spain kept their
unenviable position, alongside Greece and, at some distance, France. Thus, countries
from the Western Offshoots and the European Core stayed at the top over the entire
considered period, while Southern European countries lagged consistently behind.
A closer look suggests, however, convergence episodes within OECD countries.
Thus, in the late nineteenth and early twentieth century, the U.K., Belgium, the U.S.,
and Canada attained low gains starting from high levels, while the opposite happened
in Germany, Australia, or France, in which larger achievements matched a lower initial
standpoint. Furthermore, catching up during 1880-1914 comes from the Periphery,
with countries initially at the bottom experiencing the largest improvements in
economic freedom (Italy, Greece, Finland, Portugal, Japan). In another phase of
economic liberty expansion, 1950-2007, Peripheral countries, including Finland, Spain,
Greece and Japan, exhibited a more intense shortfall reduction and catching-up to the
European Core and the Western Offshoots. This tendency intensified in the post-1980
expansion of economic freedom, when the main improvements corresponded to
Peripheral countries (Italy, Ireland, Greece, and Spain), alongside Denmark and New
Zealand.
Drivers of Economic Liberty
The results provided by an aggregate index of economic liberty may convey the
understanding that all dimensions of economic freedom evolved along the same path.
However, their individual evolution indicates this was not the case (Figure 1). What
was, then, the over time contribution of each dimension to the historical index of
economic liberty, HIEL?
In Figures 9a-9b a breakdown of the historical index of economic liberty into its
main dimensions shows how their shares varied over time. 43 During the 1850-1914
43
The computation is facilitated by the fact that the historical index is an unweighted average of the
four dimensions, so HIEL = ¼ * IEL property rights + ¼ * IEL money + ¼ * IEL trade + ¼ * IEL regulation
32
period, money and international trade were the main contributors to the level of
economic freedom. Then, in the Interwar years, property rights, money, and regulation
contributed alike while the share of trade shrank. From 1950 onwards, the largest
contributions to the level of economic freedom came from property rights and
international trade.
Improvements in economic liberty derived, however, from different dimensions
(Table 6). I will proceed gradually to present the results. Firstly, the drivers of economic
freedom in the OECD in each of the three main phases described will be considered
(Figures 10a-10b). Then, I will take a closer look at shorter significant periods, or long
swings, within each main phase (Figures 11a-11b). Lastly, individual countries’
performance during each of the long swings and phases will be discussed (Figures 1221).
Over 1850-1914, the improvement in property rights made the main
contribution to the shortfall reduction to less than half (two-fifths and half of its total
decline for the unweighted and population-weighted indices). Then, during the first
half of the twentieth century, it was the collapse of freedom to trade internationally
(two-thirds) and, to less extent, monetary distortions (one-fourth), the main
responsible for the contraction in economic liberty (around three-fourths). Since 1950,
the liberalization of trade and factor flows was the leading force accounting for more
than half of the reduction in the economic freedom shortfall (slightly below twothirds). In the one and a half centuries examined, improvements in the legal structure
and property rights emerge as the main force behind long-term gains in economic
liberty, accounting for half of the three-fourths reduction in the shortfall.
Then, if we look at the shorter periods, or long swings, in economic freedom,
we find that, prior to World War I, it was freedom from regulation what largely makes
the difference between the intense gains before the early 1880s (that were slightly
above those derived from property rights) and the slower ones afterwards. During the
Interwar, it was the collapse of freedom to trade internationally and, to less extent,
the increase in regulation (around half and one-third, respectively), what largely
accounts for the contraction in economic freedom. A closer look at the post-1950 era
allows one to distinguish the leading role of international trade and, to a lesser extent,
money (about half and one-third of it, respectively) in the economic freedom
33
expansion of the 1950s (one-third reduction in the shortfall). During the 1960s and
1970s, increases in regulation and unsound monetary policies represented a deterrent
for the advance in economic liberty, as they offset the gains in freedom to trade and
improvements in property rights. In the second wave of expanding economic liberty,
1980-2007, trade was the overall leading force of economic liberty, accounting for up
to two-fifths of a reduction in the shortfall to one-half.
A similar breakdown at country level provides useful insights (Table 6 and
Figures 12-21, in which countries are ranked from top to bottom). Thus, it can be
observed that, up to World War I, all countries match the OECD pattern, with property
rights making the main contribution to the extension of economic freedom. There
were exceptions to this common pattern such as the United Kingdom, in which
international trade was the major force behind the increase in economic freedom, and
Australia and Germany in which regulation led economic freedom gains. It is worth
noting that increases in regulation represent the main drawback for of countries’
advancement in economic freedom during the 1880-1914 years.
During 1925-1939, the negative role played by international trade is stressed at
country level. Exceptions were France, Japan, Spain, and, again, the United States, in
which regulation played the leading role in the contraction of economic freedom.
A closer look at the 1950s allows one to highlight the leading role of
international trade in the expansion of economic freedom, with the exception of
Japan, the United States in which money led over trade. In Austria, Italy, and Australia,
money, along trade, also made a major contribution. Deregulation, in turn, played a
leading role in New Zealand, Ireland, and Portugal. In the 1960s and 1970s, regulation
and price instability represented an obstacle to economic liberty, with Sweden,
followed by Germany and Belgium, and, then, Portugal and Ireland, being the most
affected countries. In the second wave of expanding economic liberty, 1980-2007,
trade drove gains in economic freedom across the OECD but for the United States and
the United Kingdom, where money played the leading role, and Denmark, Sweden,
Netherlands, and Germany where deregulation represented the main force. Over the
entire period 1950-2007, there were exceptions to the liberalization of commodity and
factor flows as main driver of economic freedom across countries. In Switzerland and
Portugal advances in property rights were the leading force (in Spain improvements in
34
property rights share the role with trade liberalisation), while in the United States
improvements in money and property rights made the main contribution.
Over the one and a half centuries examined, improvements in the definition
and enforcement of property rights emerge as the driver to long-term achievements in
economic liberty across OECD countries. The only exceptions are the U.S. and the U.K.
in which trade liberalization made the most distinctive contribution and Australia and
New Zealand in which it came from deregulation.
Concluding Remarks
An expansion of economic liberty, that reached three fourths of its maximum
possible, has taken place in the OECD during the last one and a half centuries. Its
evolution, however, has been far from linear. After a substantial improvement since
mid-nineteenth century that peaked in 1913, World War I brought a major setback. A
post-war recovery up to 1929 was followed by a dramatic decline in the 1930s and, by
the eve of World War II, the level of economic freedom had shrunk to pre-1850 levels.
Significant progress in economic freedom during the Golden Age (1950-1973) fell short
from the pre-World War I peak. A steady since the early 1980s has resulted in the
highest levels of economic liberty in the last two centuries.
Economic freedom dimensions exhibited different trends, which confirm their
complementarity in composing a complex image of economic liberty. During 18501914, the improvement in property rights enforcement represented the main
contribution to its progress. In the Interwar, the collapse of freedom of trade and
regulation accounts for practically all the contraction in economic liberty, but from
1950 onwards liberalization of trade and factor flows has been the main force behind
its advance. Over the whole period 1850-2007, the main contribution to the increase in
economic liberty came from legal structure and property rights.
A new historical index of economic freedom raises pressing questions. Are
there any trade-offs between economic freedom and other kinds of freedom? Have
increases in economic freedom had a cost in terms of growth, inequality, wellbeing,
and democracy, or, conversely, contributed to their enhancement? Answering these
questions provide the next challenge in this research project.
35
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Table 4. Percentage Shortfall Reduction in Economic Liberty in OECD Countries, 18502007 (five-year averages)
1850/4- 1880/4- 1850/41880/4 1910/4 1910/4
Australia
1925/9- 1910/41935/9 1950/4
1950/4- 1960/4- 1980/4- 1950/41960/4 1980/4 2005/7 2005/7
1850/42005/7
73.2
-25.1
3.5
66.5
-44.7
-149.2
-85.5
-83.6
44.9
56.3
-16.8
14.9
37.0
23.1
59.5
71.4
74.8
Canada*
60.7
-4.4
-63.2
21.9
35.8
18.5
-19.2
-61.6
-34.7
-4.0
17.4
40.0
-24.6
-41.0
57.7
48.9
56.5
56.7
62.4
63.3
Denmark
40.1
27.1
56.4
-17.0
-56.8
27.1
-13.8
67.6
73.1
81.6
Finland*
36.8
69.2
31.9
-18.8
57.0
63.4
-81.1
-33.8
-74.7
-112.1
44.6
6.1
19.4
12.9
52.3
41.8
78.7
52.5
84.0
63.1
60.1
32.1
21.2
37.5
68.5
57.5
-78.5
10.4
-50.4
-122.3
61.9
30.1
-56.6
-16.1
30.1
59.1
58.3
66.8
80.2
68.7
-45.2
0.0
20.2
-19.3
59.8
61.8
Austria
Belgium
France
Germany
Greece
Ireland
Italy*
11.4
35.0
51.5
42.4
-44.9
-67.0
-64.5
-240.3
31.3
49.4
-25.4
32.2
60.5
16.7
66.0
71.4
67.7
39.9
30.7
26.2
9.5
55.6
37.3
-37.5
-75.1
-149.1
-115.3
36.8
20.9
10.3
-1.5
39.9
58.6
65.9
66.8
62.3
55.2
Portugal
59.2
29.7
7.8
16.8
62.4
41.5
-4.3
1.4
-108.4
-33.7
22.6
5.5
9.0
1.2
47.4
55.5
62.9
58.5
70.9
67.6
Spain
42.8
12.5
49.9
-117.3
-150.7
17.1
35.7
58.1
77.7
71.9
Sweden
52.6
73.8
-24.2
16.4
41.2
78.1
-37.4
-79.2
-18.4
-39.5
52.9
4.4
-119.4
10.3
52.9
26.4
51.3
37.0
66.1
80.8
44.9
24.0
-2.9
22.8
43.3
41.3
-98.8
-43.7
-125.6
41.1
16.0
29.1
31.9
-30.9
36.6
20.7
63.7
26.4
53.5
74.6
48.0
44.8
16.8
22.3
56.7
57.1
-50.0
-59.2
-75.8
-69.3
30.8
35.1
-0.4
5.5
48.9
40.5
64.5
63.5
73.0
73.5
Japan
Netherlands
New Zealand*
Norway
Switzerland
U.K.
U.S.A.
OECD
Unweighted
Weighted
Note: * starts in 1860/4
43
Table 5. OECD Country Ranking of Economic Liberty, 1850/54-2005/07
1850/54
1855/59
1860/64
1865/69
1870/74
1875/79
U.K.
8.4
U.K.
8.7
U.K.
9.0
U.K.
8.9
U.K.
8.9
U.K.
U.S.A.
7.9
New Zealand
8.5
Australia
8.6
New Zealand
8.8
New Zealand
8.7
Australia
Netherlands
7.8
Belgium
8.5
New Zealand
8.5
Australia
8.8
Australia
8.6
Belgium
1880/84
9.1
Belgium
9.1
9.1
U.K.
9.1
Switzerland
8.9
Switzerland
9.1
7.7
Netherlands
8.3
Canada
8.5
Canada
8.6
Belgium
8.5
New Zealand
8.9
New Zealand
9.0
Sweden
7.1
U.S.A.
8.1
Belgium
8.5
Belgium
8.5
Canada
8.4
Canada
8.8
Australia
9.0
Denmark
7.0
Australia
8.0
Netherlands
8.2
Netherlands
8.5
Netherlands
8.1
Belgium
8.7
France
8.9
Norway
6.8
Switzerland
8.0
Switzerland
8.0
Switzerland
8.5
Switzerland
8.1
Netherlands
8.6
Netherlands
8.7
Switzerland
6.5
Denmark
7.5
Denmark
7.8
Sweden
7.7
U.S.A.
7.9
Sweden
8.5
Norway
8.7
Spain
6.3
Germany
7.3
Sweden
7.4
Norway
7.6
Sweden
7.9
U.S.A.
8.3
Sweden
8.6
France
6.3
Sweden
7.2
Norway
7.3
Denmark
7.5
Norway
7.7
France
8.3
Canada
8.5
Australia
6.2
Norway
6.9
Germany
7.3
France
7.3
Denmark
7.6
Norway
8.2
U.S.A.
8.4
Portugal
5.8
France
6.8
France
7.1
Germany
7.3
Germany
7.6
Germany
8.1
Germany
8.2
Greece
5.8
Spain
6.6
Italy
7.0
Greece
7.2
Greece
7.0
Denmark
8.0
Denmark
8.2
Germany
5.6
Portugal
6.3
Portugal
6.7
U.S.A.
7.2
Spain
7.0
Austria
7.9
Austria
8.0
Greece
5.8
U.S.A.
6.6
Italy
7.1
France
7.0
Spain
7.7
Spain
7.9
Spain
1885/89
1890/94
6.6
Portugal
6.9
Italy
7.0
Japan
7.4
Japan
7.8
Greece
6.4
Spain
6.7
Portugal
6.6
Italy
7.1
Italy
7.4
Finland
5.5
Finland
6.3
Finland
6.5
Finland
7.0
Finland
7.1
Greece
6.9
Greece
7.1
Portugal
6.8
Portugal
7.1
1895/99
1900/04
U.K.
9.3
U.K.
9.2
U.K.
9.3
Australia
1905/09
1910/14
1925/29
Switzerland
9.3
U.K.
9.3
Switzerland
9.2
Switzerland
8.9
9.1
Belgium
9.2
Switzerland
9.2
U.K.
9.1
Switzerland
9.2
New Zealand
9.1
U.K.
8.9
Belgium
9.0
Norway
9.0
Belgium
9.1
Belgium
9.1
Belgium
9.1
U.K.
9.1
Canada
8.9
New Zealand
9.0
New Zealand
9.0
Norway
9.0
Netherlands
9.0
New Zealand
9.1
Netherlands
9.0
New Zealand
8.8
Norway
8.9
Switzerland
9.0
Netherlands
9.0
Norway
9.0
Netherlands
9.1
Japan
8.9
U.S.A.
8.8
Switzerland
8.9
Netherlands
8.9
New Zealand
9.0
New Zealand
9.0
Norway
9.0
Canada
8.8
Sweden
8.8
France
8.8
Australia
8.9
France
8.8
France
8.9
Australia
8.9
U.S.A.
8.8
Netherlands
8.8
Netherlands
8.6
Canada
8.8
Australia
8.7
Australia
8.8
Japan
8.9
Norway
8.8
Japan
8.7
Sweden
8.6
France
8.8
Canada
8.7
Canada
8.8
France
8.9
Australia
8.7
Australia
8.6
U.S.A.
8.5
Sweden
8.7
U.S.A.
8.7
Japan
8.7
Canada
8.8
Denmark
8.7
Finland
8.5
Canada
8.5
U.S.A.
8.7
Sweden
8.6
Sweden
8.7
U.S.A.
8.7
France
8.6
Denmark
8.4
Germany
8.2
Germany
8.4
Germany
8.5
U.S.A.
8.5
Germany
8.5
Germany
8.6
Norway
8.3
Denmark
8.2
Denmark
8.3
Japan
8.3
Germany
8.5
Italy
8.4
Belgium
8.5
Ireland
8.3
Japan
8.2
Japan
8.2
Denmark
8.3
Italy
8.3
Denmark
8.3
Sweden
8.3
Austria
8.2
Austria
8.1
Spain
7.8
Austria
8.2
Austria
8.3
Sweden
8.2
Italy
8.3
Belgium
7.9
Spain
7.9
Austria
7.8
Spain
7.6
Finland
8.0
Spain
8.1
Greece
8.2
Germany
7.7
Italy
7.7
Italy
7.4
Finland
7.5
Denmark
8.0
Austria
8.0
Spain
8.2
France
7.6
Greece
7.3
Finland
7.3
Italy
7.5
Spain
7.9
Finland
8.0
Austria
8.1
Italy
7.2
Finland
7.2
Greece
7.1
Greece
7.2
Greece
7.3
Greece
7.7
Finland
8.1
Greece
7.0
Portugal
6.9
Portugal
6.7
Portugal
6.8
Portugal
7.2
Portugal
7.2
Portugal
7.6
Spain
6.6
Portugal
6.6
44
Table 5. OECD Country Ranking of Economic Liberty, 1850/54-2005/07 (cont.)
1930/34
Norway
Sweden
Netherlands
Switzerland
1935/39
8.7
Sweden
8.7
U.S.A.
8.6
Netherlands
1950/54
8.4
U.S.A.
8.3
Switzerland
8.3
Canada
1955/59
9.3
U.S.A.
8.9
Canada
8.7
Switzerland
1960/64
9.4
U.S.A.
9.2
Canada
9.1
Germany
1965/69
1970/74
9.4
U.S.A.
9.3
9.2
Canada
9.1
Germany
9.1
Switzerland
8.9
9.5
U.S.A.
9.2
Canada
9.2
8.5
Norway
8.3
Ireland
8.2
Germany
8.9
Sweden
9.1
Switzerland
9.0
Germany
8.8
Japan
8.4
Canada
8.2
Belgium
8.0
Sweden
8.6
Switzerland
9.0
Sweden
8.9
Austria
8.6
U.K.
8.4
Denmark
8.1
New Zealand
8.0
Australia
8.5
Australia
8.7
Australia
8.7
Sweden
8.5
Denmark
8.3
Switzerland
8.1
Sweden
8.0
Ireland
8.4
Ireland
8.6
Austria
8.6
Denmark
8.5
8.3
New Zealand
8.0
Germany
7.9
Denmark
8.4
Denmark
8.5
Ireland
8.4
Netherlands
8.5
Belgium
Canada
8.3
Australia
7.9
Denmark
7.9
New Zealand
8.3
Netherlands
8.5
Denmark
8.4
Australia
8.4
New Zealand
8.2
U.K.
7.8
U.K.
7.9
Belgium
8.3
Austria
8.5
Netherlands
8.3
New Zealand
8.2
U.S.A.
8.1
Japan
7.8
Australia
7.7
Netherlands
8.3
New Zealand
8.4
Japan
8.3
Japan
8.2
8.0
Ireland
7.5
Netherlands
7.6
U.K.
8.2
Belgium
8.4
New Zealand
8.2
Finland
8.2
Greece
Ireland
8.0
Belgium
7.4
Norway
7.5
Austria
8.0
U.K.
8.2
Finland
8.2
Ireland
8.1
Australia
7.9
Greece
7.3
Italy
7.2
Italy
8.0
Japan
8.1
Italy
8.2
U.K.
8.1
France
7.9
Finland
7.2
France
7.1
Norway
7.9
Finland
8.1
U.K.
8.2
Belgium
8.0
7.7
France
6.7
Portugal
6.7
Japan
7.9
Italy
8.1
Belgium
Finland
8.1
France
7.9
Spain
7.7
Portugal
6.7
Finland
6.6
France
7.4
Norway
8.0
Norway
8.1
Italy
7.8
Austria
7.2
Germany
5.9
Austria
6.5
Finland
7.3
France
7.3
France
7.4
Norway
7.7
Germany
7.1
Italy
5.9
Japan
6.3
Greece
6.9
Greece
7.2
Portugal
6.7
Portugal
6.5
7.0
Austria
5.6
Greece
6.0
Portugal
6.8
Portugal
6.9
Greece
6.5
Spain
6.3
6.6
Spain
2.7
Spain
5.4
Spain
5.6
Spain
6.2
Spain
6.3
Greece
5.8
Italy
Portugal
1975/79
U.S.A.
1980/84
1985/89
1990/94
1995/99
2000/04
2005/07
9.2
U.S.A.
9.3
U.S.A.
9.4
U.S.A.
9.4
U.S.A.
9.5
U.S.A.
9.4
U.S.A.
9.5
Canada
8.9
Switzerland
9.1
Switzerland
9.3
Switzerland
9.3
New Zealand
9.5
Canada
9.4
Canada
9.5
Switzerland
8.9
Canada
8.9
Canada
9.1
Canada
9.3
Canada
9.4
Ireland
9.3
Denmark
9.4
Austria
8.7
U.K.
8.8
U.K.
9.0
New Zealand
9.2
Ireland
9.3
Finland
9.3
New Zealand
9.3
Germany
8.6
Germany
8.8
New Zealand
8.9
Ireland
9.1
Switzerland
9.3
Switzerland
9.3
Switzerland
9.3
Netherlands
8.5
Japan
8.7
Japan
8.9
U.K.
9.0
U.K.
9.3
Denmark
9.3
Ireland
9.3
Denmark
8.3
Austria
8.7
Netherlands
8.9
Denmark
9.0
Denmark
9.3
U.K.
9.3
Finland
9.3
Finland
8.3
Netherlands
8.6
Germany
8.9
Netherlands
8.9
Norway
9.1
New Zealand
9.2
U.K.
9.2
Japan
8.2
Australia
8.5
Australia
8.8
Austria
8.9
Australia
9.0
Germany
9.1
Netherlands
9.2
Australia
8.1
Finland
8.5
Austria
8.8
Japan
8.9
Finland
9.0
Sweden
9.1
Belgium
9.1
Ireland
8.1
New Zealand
8.4
Ireland
8.7
Australia
8.9
Sweden
9.0
Netherlands
9.0
Germany
9.1
New Zealand
8.1
Ireland
8.3
Finland
8.7
Norway
8.8
Belgium
8.9
Norway
9.0
Norway
9.1
Sweden
8.1
Denmark
8.3
Denmark
8.7
Belgium
8.8
Netherlands
8.9
Australia
9.0
Australia
9.0
U.K.
8.0
Norway
8.2
Sweden
8.4
Germany
8.7
Germany
8.9
Italy
9.0
Italy
9.0
Norway
7.9
Belgium
8.0
Norway
8.4
Sweden
8.6
Austria
8.8
Austria
9.0
Sweden
9.0
Belgium
7.9
Sweden
7.9
Belgium
8.2
Finland
8.6
Japan
8.7
Belgium
8.9
Austria
9.0
France
7.7
France
7.6
France
8.2
France
8.5
Italy
8.7
Spain
8.9
Spain
9.0
Italy
7.5
Italy
7.6
Spain
8.1
Italy
8.4
Spain
8.7
Japan
8.8
Japan
8.9
Greece
6.8
Spain
7.5
Italy
8.0
Spain
8.3
Portugal
8.6
Portugal
8.7
Greece
8.7
Spain
6.6
Portugal
7.0
Portugal
7.6
Portugal
8.2
France
8.5
Greece
8.6
Portugal
8.7
Portugal
6.4
Greece
6.8
Greece
7.4
Greece
7.7
Greece
8.2
France
8.5
France
8.6
45
Table 6. Drivers of Economic Liberty: Decomposing the Percentage Change in
Shortfall in OECD Countries, 1850-2007 (five-year averages)
1850/4-1910/4
1850/4-1880/4
Due to#
Due to#
TOTAL (%) Prop. Rights Money Trade Regulation TOTAL (%) Prop. Rights Money Trade Regulation
Australia
66.5
0.23
0.36
-0.03
0.44
73.2
0.14
0.32
0.00
0.54
Belgium
35.8
0.48
0.26
0.40
-0.21
60.7
0.39
0.16
0.24
0.16
Canada*
18.5
1.89
-0.05
-0.43
-4.4
-4.46
0.57
3.14
Denmark
56.4
0.30
0.21
0.28
40.1
0.16
0.24
0.25
Finland*
57.0
0.32
0.15
0.19
36.8
0.00
0.12
0.36
France
63.4
0.58
0.10
0.16
0.16
69.2
0.48
0.11
0.17
0.23
Germany
68.5
0.31
0.22
0.06
0.42
60.1
0.13
0.25
0.07
0.55
Greece
57.5
0.52
0.28
-0.04
0.26
32.1
0.58
0.38
-0.27
0.36
Italy*
42.4
0.85
0.04
0.17
-0.06
11.4
0.76
0.14
-0.35
0.46
Netherlands
55.6
0.33
0.25
0.25
0.16
39.9
0.06
0.28
0.35
0.32
New Zealand*
37.3
0.24
0.55
-0.30
0.51
30.7
0.17
0.58
-0.50
0.75
Norway
62.4
0.71
0.06
0.25
-0.02
59.2
0.53
0.06
0.24
0.16
Portugal
41.5
0.43
0.32
0.04
29.7
0.17
0.41
0.11
Spain
49.9
0.61
0.22
0.08
0.04
42.8
0.57
0.26
0.05
0.06
Sweden
41.2
0.51
0.08
0.35
0.06
52.6
0.64
0.01
0.24
0.11
Switzerland
78.1
0.33
0.26
0.11
0.31
73.8
0.24
0.28
0.14
0.35
U.K.
43.3
0.23
0.28
0.47
0.02
44.9
0.15
0.08
0.46
0.31
U.S.A.
41.3
0.67
0.06
0.41
-0.14
24.0
0.67
0.14
0.16
0.03
Unweighted
56.7
0.40
0.20
0.14
0.23
48.0
0.29
0.22
0.13
0.34
Weighted
57.1
0.48
0.16
0.16
0.23
44.8
0.33
0.19
0.13
0.39
OECD
Notes: * 1860/4-1910/4 and 1860/4-1880/4
# The four columns add up to 1.
46
Table 6. Drivers of Economic Liberty: Decomposing the Percentage Change in
Shortfall in OECD Countries, 1850-2007 (five-year averages) (cont.)
1880/4-1910/4
Due to#
TOTAL (%) Prop. Rights Money Trade Regulation
Australia
Austria
-25.1
-0.82
-0.08
0.32
1.58
3.5
-0.46
-0.52
1.78
1.08
Belgium
-63.2
0.27
0.02
0.01
0.70
Canada
21.9
0.66
0.07
0.26
0.01
Denmark
27.1
0.64
0.14
0.33
-0.11
Finland
31.9
0.91
0.21
-0.13
0.01
France
-18.8
-0.61
0.26
0.34
1.00
Germany
21.2
1.56
0.01
-0.06
-0.52
Greece
37.5
0.44
0.14
0.25
0.14
Italy
35.0
0.88
0.00
0.37
-0.24
Japan
51.5
0.65
0.03
0.22
0.09
Netherlands
26.2
1.04
0.19
0.00
-0.22
New Zealand
9.5
0.58
0.38
0.63
-0.59
Norway
7.8
3.93
0.01
0.33
-3.27
Portugal
16.8
1.08
0.09
-0.12
-0.04
Spain
12.5
0.86
-0.01
0.25
-0.11
-24.2
1.09
-0.22
-0.16
0.28
Ireland
Sweden
Switzerland
16.4
1.90
-0.06
-0.33
-0.51
U.K.
-2.9
-1.93
-5.13
0.02
8.04
U.S.A.
22.8
0.68
-0.05
0.76
-0.39
Unweighted
16.8
1.03
0.13
0.23
-0.40
Weighted
22.3
1.02
0.05
0.27
-0.34
OECD
47
Table 6. Drivers of Economic Liberty: Decomposing the Percentage Change in
Shortfall in OECD Countries, 1850-2007 (five-year averages) (cont.)
1910/4-1950/4
1925/9-1935/9
Due to#
Due to#
TOTAL (%) Prop. Rights Money Trade Regulation TOTAL (%) Prop. Rights Money Trade Regulation
Australia
-85.5
-83.6
-34.7
-4.0
-56.8
0.07
-0.41
0.22
0.95
-0.54
0.34
0.49
0.22
0.89
0.06
0.54
0.75
1.29
-0.23
1.21
0.05
0.21
-0.73
-0.61
0.27
-44.7
-149.2
-19.2
-61.6
-17.0
0.00
0.63
0.56
-0.01
0.02
-0.03
-0.08
-0.61
0.09
-1.55
0.91
0.44
0.89
0.50
1.92
0.12
-0.07
0.16
0.42
0.61
-74.7
-112.1
-50.4
-122.3
0.0
-64.5
-0.68
0.20
-0.25
0.17
0.36
0.35
0.25
0.24
1.07
0.42
1.31
0.51
0.24
0.03
-0.31
0.07
-0.45
0.41
0.60
0.44
-81.1
-33.8
-78.5
10.4
-45.2
-44.9
-0.12
0.00
0.45
-1.95
0.04
-0.02
0.29
-0.08
-0.34
2.09
-0.01
-0.04
0.58
0.47
0.82
-0.49
0.64
0.56
0.26
0.60
0.07
1.36
0.34
0.51
-240.3
-149.1
-115.3
-108.4
-33.7
-150.7
0.16
-0.02
0.09
0.13
0.64
0.30
0.30
0.15
0.12
0.11
0.01
0.13
0.42
0.60
0.65
0.59
0.27
0.31
0.12
0.27
0.14
0.18
0.07
0.26
-67.0
-37.5
-75.1
-4.3
1.4
-117.3
-0.01
-0.04
0.05
0.95
-3.29
0.09
0.23
-0.08
0.06
-4.39
10.61
0.31
0.27
0.77
0.59
2.76
-6.60
0.20
0.51
0.35
0.30
1.68
0.28
0.39
-18.4
-39.5
-125.6
41.1
-2.52
0.57
0.02
-0.01
0.89
-0.10
0.13
-0.14
2.57
0.29
0.96
0.79
0.06
0.24
-0.11
0.36
-37.4
-79.2
-98.8
-43.7
0.09
0.09
-0.01
0.08
-0.44
0.02
-0.04
0.20
0.83
0.58
0.73
0.07
0.52
0.32
0.32
0.65
Unweighted
-75.8
-0.03
0.25
0.66
0.11
-50.0
0.20
-0.07
0.57
0.29
Weighted
-69.3
0.03
0.33
0.58
0.05
-59.2
0.16
-0.01
0.49
0.36
Austria
Belgium
Canada
Denmark
Finland
France
Germany
Greece
Ireland
Italy
Japan
Netherlands
New Zealand
Norway
Portugal
Spain
Sweden
Switzerland
U.K.
U.S.A.
OECD
48
Table 6. Drivers of Economic Liberty: Decomposing the Percentage Change in
Shortfall in OECD Countries, 1850-2007 (five-year averages) (cont.)
1950/4-2005/7
Panel A
Australia
1950/4-1960/4
Due to#
Due to#
TOTAL (%) Prop. Rights Money Trade Regulation TOTAL (%) Prop. Rights Money Trade Regulation
59.5
71.4
56.5
56.7
73.1
0.06
0.15
0.51
0.18
0.14
0.30
0.35
0.22
0.11
0.08
0.49
0.48
0.61
0.57
0.67
0.15
0.01
-0.34
0.14
0.11
44.9
56.3
17.4
40.0
27.1
0.02
0.08
0.22
0.05
0.08
0.40
0.42
0.61
0.27
-0.03
0.37
0.37
0.85
0.60
0.97
0.20
0.13
-0.68
0.08
-0.02
78.7
52.5
58.3
66.8
61.8
66.0
0.05
0.27
0.25
0.26
0.10
0.08
0.20
0.44
0.20
0.21
0.07
0.29
0.70
0.50
0.88
0.65
0.82
0.44
0.06
-0.21
-0.33
-0.12
0.00
0.18
44.6
6.1
61.9
30.1
20.2
31.3
0.06
-3.64
0.14
0.25
-0.06
0.07
0.30
2.49
0.15
0.40
0.09
0.44
0.64
1.20
0.78
0.44
0.52
0.44
0.00
0.95
-0.07
-0.09
0.45
0.05
71.4
65.9
66.8
62.9
58.5
77.7
0.21
0.21
0.09
0.14
0.82
0.40
0.33
0.12
0.03
0.06
0.02
0.10
0.47
0.54
0.77
0.64
0.51
0.42
-0.01
0.12
0.11
0.15
-0.35
0.08
49.4
36.8
20.9
22.6
5.5
17.1
0.29
0.16
0.06
0.04
0.25
0.13
0.44
0.17
0.35
0.28
0.15
0.18
0.24
0.63
0.13
0.54
0.12
0.69
0.03
0.03
0.46
0.14
0.48
0.00
51.3
37.0
63.7
26.4
0.11
0.50
0.15
0.50
0.26
0.01
0.05
0.56
0.82
0.46
0.83
0.16
-0.20
0.02
-0.02
-0.23
52.9
4.4
16.0
29.1
0.03
1.32
-0.15
0.33
0.22
-0.74
0.34
0.67
0.56
0.65
0.56
-0.09
0.19
-0.24
0.26
0.09
Unweighted
64.5
0.24
0.19
0.59
-0.01
30.8
0.08
0.34
0.51
0.07
Weighted
63.5
0.24
0.24
0.54
-0.02
35.1
0.12
0.39
0.44
0.05
Austria
Belgium
Canada
Denmark
Finland
France
Germany
Greece
Ireland
Italy
Japan
Netherlands
New Zealand
Norway
Portugal
Spain
Sweden
Switzerland
U.K.
U.S.A.
OECD
49
Table 6 Drivers of Economic Liberty: Decomposing the Percentage Change in Shortfall
in OECD Countries, 1850-2007 (five-year averages) (cont.)
1960/4-1980/4
1980/4-2005/7
Due to#
Due to#
TOTAL (%) Prop. Rights Money Trade Regulation TOTAL (%) Prop. Rights Money Trade Regulation
Australia
-16.8
-0.05
0.85
-0.16
0.35
37.0
0.10
0.32
0.44
0.14
Austria
14.9
0.88
-0.14
1.73
-1.47
23.1
0.07
0.31
0.27
0.34
Belgium
-24.6
-0.71
0.23
0.13
1.35
57.7
0.18
0.11
0.38
0.34
Canada
-41.0
-0.23
0.73
0.27
0.24
48.9
0.05
0.32
0.36
0.26
Denmark
1.28
67.6
0.04
0.23
0.35
0.38
-13.8
-0.62
0.65
-0.30
Finland
19.4
0.09
-0.51
1.21
0.21
52.3
0.01
0.33
0.58
0.09
France
12.9
2.34
-0.55
0.24
-1.04
41.8
0.23
0.43
0.46
-0.13
Germany
-56.6
-0.18
0.12
-0.07
1.13
30.1
0.10
0.28
0.10
0.53
Greece
-16.1
0.21
1.06
-0.96
0.69
59.1
0.26
0.29
0.40
0.05
Ireland
-19.3
-0.22
0.88
-1.24
1.59
59.8
0.07
0.28
0.38
0.27
Italy
-25.4
-0.21
0.66
0.05
0.50
60.5
-0.01
0.33
0.31
0.37
Japan
32.2
0.04
0.26
0.89
-0.19
16.7
0.01
-0.51
1.31
0.20
Netherlands
10.3
0.82
-0.53
1.34
-0.63
39.9
0.12
0.23
0.17
0.48
New Zealand
-1.5
-2.80
14.28 -22.37
11.89
58.6
0.03
0.24
0.49
0.24
9.0
0.66
-1.12
1.05
0.40
47.4
0.11
0.16
0.62
0.11
Norway
Portugal
Spain
Sweden
1.2
36.52
-14.02
6.28
-27.78
55.5
0.09
0.32
0.42
0.17
35.7
1.00
-0.10
0.19
-0.09
58.1
-0.01
0.23
0.50
0.28
-119.4
-0.03
0.19
-0.08
0.92
52.9
0.05
0.23
0.15
0.58
Switzerland
10.3
0.69
-0.19
0.73
-0.22
26.4
0.26
0.25
0.31
0.18
U.K.
31.9
0.31
-0.58
1.54
-0.28
36.6
0.16
0.64
0.11
0.09
-30.9
-0.18
1.28
-0.29
0.19
20.7
-0.01
1.21
0.04
-0.23
-0.4
-32.94
25.99 -30.38
38.32
48.9
0.09
0.28
0.39
0.24
5.5
2.54
-1.80
-2.35
40.5
0.08
0.34
0.37
0.22
U.S.A.
OECD
Unweighted
Weighted
2.60
50
Table 6. Drivers of Economic Liberty: Decomposing the Percentage Change in
Shortfall in OECD Countries, 1850-2007 (five-year averages) (cont.)
1850/4-2005/7
Due to#
TOTAL (%)
Prop. Rights
Money Trade Regulation
Australia
74.8
0.21
0.34
0.00
0.45
Belgium
62.4
0.60
0.24
0.25
-0.13
Canada*
63.3
0.64
0.02
0.32
Denmark
81.6
0.46
0.18
0.24
Finland*
84.0
0.51
0.10
0.21
France
63.1
0.63
0.16
0.21
0.01
Germany
80.2
0.40
0.21
0.09
0.31
Greece
68.7
0.55
0.25
0.17
0.06
Italy*
67.7
0.85
0.07
0.18
-0.11
Netherlands
62.3
0.57
0.22
0.21
0.00
New Zealand*
55.2
0.19
0.27
0.20
0.34
Norway
70.9
0.65
0.04
0.33
-0.01
Portugal
67.6
0.63
0.21
0.29
Spain
71.9
0.66
0.15
0.30
-0.14
Sweden
66.1
0.79
0.05
0.24
-0.08
Switzerland
80.8
0.33
0.26
0.14
0.27
U.K.
53.5
0.38
0.14
0.36
0.12
U.S.A.
74.6
0.43
0.06
0.50
0.01
Unweighted
73.0
0.49
0.17
0.21
0.12
Weighted
73.5
0.51
0.14
0.22
0.15
OECD
Note: * 1860/4-2005/7
# The four columns add up to 1.
51
Figure 1. Economic Liberty Dimensions, 1850-2007 (unweighted averages)
Figure 2. Dispersion of Economic Liberty Dimensions, 1850-2007
(coefficient of variation) (unweighted averages)
52
Figure 3a. Indices of Economic Liberty: Alternative Samples (unweighted averages)
Figure 3b. Indices of Economic Liberty: Alternative Samples (population-weighted
averages)
Note: The number after HIEL indicates the number of countries included in each sample.
HIEL14 (1850-2007), Australia, Belgium, Denmark, France, Germany, Greece, Netherlands, Norway,
Portugal, Spain, Sweden, Switzerland, U.K. and U.S.A.
HIEL18,(1862-2007), those in HIEL14 plus Canada, Finland, Italy, and New Zealand
HIEL20 (1875-2007), those in HIEL18 plus Austria and Japan
HIEL21 (1925-2007), those in HIEL20 plus Ireland
53
Figure 4. Historical Indices of Economic Liberty (HIEL) in OECD, 1850-2007:
Unweighted and Population-weighted Averages (spliced)
Figure 5. Alternative Historical Indices of Economic Liberty with Full (HIEL) and
Reduced (RIEL) Set of Indicators for 1950-2007 (average spliced estimates
(Unweighted)
54
Figure 6. Alternative Historical Indices of Economic Liberty (HIEL) with Equal and PCA
Weighting (average spliced estimates) (Unweighted)
Figure 7. Dispersion of Economic Liberty in OECD Countries, 1850-2007 coefficient of
variation) (Unweighted and Population-weighted)
55
Figure 8a. Historical Index of Economic Liberty (HIEL) [vertical] and Fraser Institute’s
Index of Economic Freedom (EFW4) [horizontal], 1970-2005/7
Sources: See the text and Gwartney et al. (2012)
Figure 8b. Historical Index of Economic Liberty (HIEL) and Fraser Institute’s Index of
Economic Freedom (EFW4), 1970-2005/7
Sources: See the text and Gwartney et al. (2012)
56
Figure 9a. Economic Liberty and its Dimensions: OECD, 1850-2007 (unweighted
average)
Figure 9b. Economic Liberty and its Dimensions: OECD, 1850-2007 (populationweighted average)
57
Figure 10a. Drivers of Economic Freedom over Main Phases: Decomposing the
Percentage Shortfall in the OECD, 1850-2007 (unweighted average)
Figure 10b. Drivers of Economic Freedom over Main Phases: Decomposing the
Percentage Shortfall in the OECD, 1850-2007 (population-weighted average)
58
Figure 11a. Drivers of Economic Freedom over Long Swings: Decomposing the
Percentage Shortfall in the OECD, 1850-2007 (unweighted average)
Figure 11b. Drivers of Economic Freedom over Long Swings: Decomposing the
Percentage Shortfall in the OECD, 1850-2007 (population-weighted average)
59
Figure 12. Drivers of Economic Freedom: Decomposing the Percentage Shortfall in
OECD Countries, 1850/4-1910/4
Note: Data for Canada, Finland, New Zealand, and Italy correspond to 1860/4-1910/4
Figure 13. Drivers of Economic Freedom: Decomposing the Percentage Shortfall in
OECD Countries, 1850/4-1880/4
Note: Data for Canada, Finland, New Zealand, and Italy correspond to 1860/4-1880/4
60
Figure 14. Drivers of Economic Freedom: Decomposing the Percentage Shortfall in
OECD Countries, 1880/4-1910/4
Figure 15. Drivers of Economic Freedom: Decomposing the Percentage Shortfall in
OECD Countries, 1910/4-1950/4
61
Figure 16. Drivers of Economic Freedom: Decomposing the Percentage Shortfall in
OECD Countries, 1925/9-1935/9
Figure 17. Drivers of Economic Freedom: Decomposing the Percentage Shortfall in
OECD Countries, 1950/4-2005/7
62
Figure 18. Drivers of Economic Freedom: Decomposing the Percentage Shortfall in
OECD Countries, 1950/4-1960/4
Figure 19. Drivers of Economic Freedom: Decomposing the Percentage Shortfall in
OECD Countries, 1960/4-1980/4
63
Figure 20. Drivers of Economic Freedom: Decomposing the Percentage Shortfall in
OECD Countries, 1980/4-2005/7
Figure 21. Drivers of Economic Freedom: Decomposing the Percentage Shortfall in
OECD Countries, 1850-2007
Note: Data for Canada, Finland, New Zealand, and Italy correspond to 1860/4-1910/4
64
Appendix A. Table A1. Historical Indices of Economic Liberty in the OECD, 1850-2007
(five-year averages)
OECD
Unweighted
PopulationWeighted
1850/54
6.7
6.9
1855/59
7.4
7.5
1860/64
7.5
7.4
1865/69
7.7
7.5
1870/74
7.7
7.6
1875/79
8.1
8.1
1880/84
8.3
8.3
1885/89
8.3
8.4
1890/94
8.4
8.4
1895/99
8.4
8.5
1900/04
8.5
8.6
1905/09
8.6
8.7
1910/14
8.6
8.7
1925/29
8.2
8.2
1930/34
8.0
7.9
1935/39
7.3
7.2
1950/54
7.5
7.8
1955/59
8.1
8.4
1960/64
8.3
8.5
1965/69
8.2
8.5
1970/74
8.1
8.4
1975/79
8.0
8.4
1980/84
8.3
8.6
1985/89
8.6
8.8
1990/94
8.8
8.9
1995/99
9.0
9.1
2000/04
9.0
9.1
2005/07
9.1
9.2
65
Appendix A. Table A2. Alternative OECD Country Ranking: Fraser Institute’s Index of
Economic Freedom (EFW4) and Historical Index of Economic Liberty (HIEL), 19702005/7
EFW4
1970
HIEL
EFW4
HIEL
EFW4
1975
HIEL
EFW4
HIEL
EFW4
1980
HIEL
8.7
9.3
8.4
9.1
8.6
9.2
U.S.A.
U.S.A.
U.S.A.
U.S.A.
U.S.A.
Canada
Canada
8.2
9.2 Switzerland 7.7 Switzerland 8.8 Switzerland 8.3
9.1
Canada
Switzerland
8.1 Switzerland 9.1
7.6
8.8
8.3
9.0
Belgium
Canada
Germany
Germany
8.1
9.1
7.6
8.5 Netherlands 8.1
8.7
Canada
Austria
Sweden
Austria
7.7
8.8
7.5
8.5
8.0 Germany
8.7
Germany
Belgium
Austria
U.K.
7.6
8.8 Netherlands 7.2 Netherlands 8.3
7.9
8.7
Germany
Australia
Japan
7.6
8.6
6.9 Denmark
8.2
7.3
8.6
Denmark
Australia
Sweden
7.4 Denmark
8.6
6.7
8.1
7.3 Netherlands 8.6
Austria
Austria
Finland
7.3 Netherlands 8.5
6.7 N. Zealand 8.1
7.2
8.5
U.K.
U.K.
Finland
7.2
8.4
6.5
8.0
7.2 Denmark
8.4
Finland
Ireland
Denmark
Ireland
Australia
Australia
6.8
8.3
6.5
7.9
7.2
8.3
Japan
Finland
Japan
Japan
6.8
8.3
6.5
7.9
7.2 N. Zealand 8.3
Finland
Japan
U.K.
Norway
Norway
6.7
8.2
6.4
7.8 N. Zealand 7.0
8.1
Australia
Ireland
6.7 N. Zealand 8.2
6.3
7.7
6.9
8.1
Norway
Belgium
Ireland
Belgium
U.K.
Belgium
6.7
8.2
6.2
7.6
6.7
8.1
France
Sweden
Italy
Ireland
Sweden
6.6
8.0
6.1
7.6
6.6
7.8
Sweden
Norway
France
France
France
6.5
7.9 N. Zealand 6.0
7.6
6.6
7.6
France
Norway
Italy
Italy
6.3
7.7
5.6
7.2
6.3
7.5
Spain
Spain
Portugal
Greece
Spain
6.2
6.9
5.6
6.4
6.1
7.4
Greece
Portugal
Spain
Spain
Portugal
6.1
6.5
5.2
6.1
5.7
6.9
Italy
Greece
Greece
Portugal
Greece
6.1
6.1
3.7
5.5
5.7
6.8
Portugal
Italy
Coefficient of correlation
0.72
0.86
0.88
Canada
U.S.A.
Germany
Belgium
Switzerland
Netherlands
Denmark
Australia
Finland
Ireland
U.K.
France
N. Zealand
Japan
Norway
Austria
Sweden
Portugal
Spain
Italy
Greece
EFW4
U.S.A.
Switzerland
Canada
U.K.
Netherlands
Germany
Belgium
Australia
Finland
Sweden
Denmark
Norway
Japan
Austria
Ireland
N. Zealand
France
Spain
Italy
Portugal
Greece
1985
8.6
U.S.A.
8.6 Switzerland
U.K.
8.4
Japan
8.3
Canada
8.1
8.0 Germany
8.0 N. Zealand
7.9 Netherlands
Austria
7.6
Australia
7.5
Finland
7.4
Ireland
7.4
7.3 Denmark
Norway
7.3
Sweden
7.1
Belgium
6.9
France
6.7
Spain
6.6
Italy
6.2
Portugal
5.9
Greece
5.5
Coefficient of correlation
9.4
9.3
9.0
8.9
8.9
8.9
8.8
8.8
8.7
8.7
8.6
8.5
8.5
8.4
8.2
8.2
8.0
7.8
7.8
7.4
6.8
U.S.A.
U.K.
Canada
Switzerland
N. Zealand
Germany
Denmark
Netherlands
Sweden
Norway
Belgium
Australia
Finland
Japan
Austria
France
Ireland
Italy
Spain
Portugal
Greece
1990
U.S.A.
8.8
8.7 Switzerland
Canada
8.7
8.6 N. Zealand
8.5 Denmark
Austria
8.3
Japan
8.3
U.K.
8.3
Finland
8.3
Australia
8.2
Ireland
8.2
8.1 Netherlands
8.0 Germany
Norway
8.0
Belgium
8.0
Sweden
8.0
France
7.5
Italy
7.4
Spain
7.0
Portugal
6.5
6.3
Greece
0.89
9.4
9.3
9.3
9.0
9.0
8.9
8.9
8.9
8.9
8.9
8.9
8.9
8.8
8.7
8.7
8.6
8.4
8.3
8.1
7.8
7.5
0.92
66
N. Zealand
Ireland
U.S.A.
U.K.
Denmark
Netherlands
Finland
Canada
Norway
Switzerland
Australia
Sweden
Germany
Belgium
Austria
Japan
Spain
France
Portugal
Italy
Greece
1995
HIEL
9.2 N. Zealand
U.S.A.
8.9
8.9 Switzerland
Canada
8.9
8.9 Denmark
Ireland
8.8
U.K.
8.7
Norway
8.7
Australia
8.7
Sweden
8.6
Belgium
8.6
Austria
8.5
Japan
8.5
8.3 Netherlands
Finland
8.3
Spain
8.1
8.0 Germany
Italy
8.0
Portugal
7.9
France
7.4
Greece
6.7
9.5
9.4
9.3
9.3
9.3
9.2
9.1
9.0
9.0
8.8
8.8
8.7
8.7
8.7
8.7
8.6
8.6
8.5
8.5
8.4
7.9
0.87
Appendix A. Table A2. Alternative OECD Country Ranking: Fraser Institute’s Index of
Economic Freedom (EFW4) and Historical Index of Economic Liberty (HIEL), 19702005/7 (cont.)
2000/4
2005/7
EFW4
U.K.
Denmark
HIEL
EFW4
HIEL
N. Zealand
8.9
U.S.A.
9.5
9.4
Denmark
8.9
9.5
9.0
U.S.A.
9.4
9.0
9.0
Canada
Ireland
9.3
Netherlands
8.8
Canada
Denmark
Netherlands
8.8
Finland
9.3
Ireland
8.8
N. Zealand
9.3
Switzerland
8.8
Switzerland
9.3
8.7
Switzerland
9.3
Finland
8.8
Denmark
9.3
U.K.
Canada
8.7
Ireland
9.3
U.S.A.
Canada
8.8
U.K.
9.3
Australia
8.7
Finland
9.3
8.7
N. Zealand
9.2
Finland
8.6
U.K.
9.2
Ireland
8.7
Germany
9.1
Sweden
8.5
Netherlands
9.2
Sweden
8.6
Sweden
9.1
Austria
8.5
Belgium
9.1
9.0
Switzerland
8.5
Germany
9.1
U.S.A.
Belgium
8.4
Norway
9.1
8.3
Australia
9.0
8.2
Italy
9.0
9.0
N. Zealand
Austria
8.6
Netherlands
Australia
8.6
Norway
9.0
Belgium
8.4
Australia
9.0
Germany
8.4
Italy
9.0
Japan
France
9.4
8.2
Austria
9.0
Germany
8.2
Sweden
Japan
8.2
Belgium
8.9
France
8.2
Austria
9.0
Norway
8.2
Spain
8.9
Norway
8.1
Spain
9.0
Portugal
8.1
Japan
8.8
Portugal
7.9
Japan
8.9
8.7
Spain
8.0
Portugal
8.7
Spain
7.8
Greece
Italy
7.8
Greece
8.6
Italy
7.5
Portugal
8.7
Greece
7.4
France
8.5
Greece
7.5
France
8.6
Coefficient of correlation
0.77
0.69
67
Figure A.1. Economic Liberty Dimensions, 1850-2007 (population-weighted averages)
Figure A.2. Dispersion of Economic Liberty Dimensions, 1850-2007
(coefficient of variation) (unweighted averages)
68
Appendix on Sources
Legal Structure and Security of Property Rights
A) Constraint on the executive (EXCONST).
This measure focuses on the operational independence of chief executive.
Thus, it relates to “the extent of institutionalized constraints on the decision-making
powers of chief executives” and aims at capturing “the checks and balances between
the various parts of the decision-making process” (Marshall et al. 2013: 24). Its value
ranges between 1 and 7. A value of 1 would correspond a situation in which “there are
no regular limitations on the executive’s actions” while a value of 7 is that of a
situation in which “accountability groups have effective authority equal to or greater
than the executive in most activity” (Marshall et al. 2013: 24-25). Its source is Marshall
(2013).
B) Contract-Intensive Money (CIM)
The “contract intensive money” (CIM) measures the percentage of deposits in
money supply: CIM = (M2 – C) / M2,
In which C represents currency outside banks and M2 the money supply including all
(current and term) deposits.
In the construction of the transformed index, the range within which CIM fluctuates, 1
and 0, has provided the upper and lower bounds.
The sources used for each country are,
Australia
Vamplew (1987), up to 1983; IMF, 1984-2001; Reserve Bank of Australia (RBA), 2002
onwards
Austria
Mitchell (2008), currency outside banks, up to 1937. Demand and time and savings
deposits, Komlos (1987), 1867-1913; Mitchell (2008), 1925-1937; IMF, since 1950.
Belgium
Up to 1939, Mitchell (2008), banknote in circulation and time and savings deposits;
Banks (2010), demand deposits except for 1870-74 in which the level for 1875 is
69
projected backwards with banknotes in circulation; Mitchell (2008), 1950-1968; IMF,
since 1969.
Canada
Mitchell (2008), 1856-1870; McInnis (2001), 1871-1913; Canadian Historical Statistics,
1913-1939; IMF, 1950-2000; Statistics Canada, 2001 onwards.
Denmark
Mitchell (2008), 1850-1939; IMF, from 1950 onwards.
Finland
Mitchell (2008), 1862-1939; IMF from 1950 onwards.
France
Mitchell (2008), currency outside banks and time and savings deposits, 1850-1939;
Saint-Marc (1983), demand deposits, 1850-1939; IMF from 1950 onwards.
Germany
Mitchell (2008), 1850-1913; Ritschl (2002), 1925-1939; IMF from 1950 onwards.
Greece
Kostelenos et al. (2007), 1850-1938; Lazaretou (2009), 1939; IMF, from 1953 onwards.
Estimates for 1950-52 were computed by projecting the CIM level for 1953 with an
alternative CIM derived with M1 from Mitchell (2008).
Ireland
Mitchell (2008), 1913, 1925-1939; IMF, from 1950 onwards
Italy
de Bonis et al. (2012)
Japan
Currency outside banks, Mitchell (2008), 1913, 1925-1939, 1950-1952; Deposits,
Patrick (1967), 1888-1910; Yamamura (1972), 1911-1926. Estimates for 1873-1887,
1927-1939, and 1950-1952 were computed with Mitchell (2008) re-scaled to match
the levels for 1888, 1926, and 1953, respectively. IMF, from 1953 onwards
Netherlands
1850-1912, Data on demand deposits is lacking. The persistence of the prolongatie
market explains the slow development of deposits in Dutch commercial banking
(Jonker 1997: 101-102) and, perhaps, why there is no record of demand deposits. In
fact, the public used money put on prolongatie as a form of interest-bearing demand
70
deposits backed by securities, and thus it provides a substitute for demand deposits (I
owe this remark to Joost Jonker). As a crude alternative, M1 (that is, currency outside
banks and demand deposits) was estimated over 1850-1912 by projecting its level in
1913 backwards with data on currency outside banks from Mitchell (2008). Time and
savings deposits also come from Mitchell (2008). 1925-1939, from Mitchell (2008);
1950 onwards, from IMF.
New Zealand
Currency outside banks, Mitchell (2008), 1870-1939; IMF, 1950-1988; Statistics New
Zealand, 1989-2004; Reserve Bank of New Zealand, from 2005 onwards. Demand
deposits, 1850-1913, Statistics New Zealand; Time and savings deposits, Mitchell
(2008); All deposits, Statistics New Zealand, 1925-1964; IMF, 1965-2006; Reserve Bank
of New Zealand, 2007.
Norway
Klovland (2004) and Eitrheim et al. (2007)
Portugal
Reis (1990), 1854-1912; Reis (2001), 1850-1853, 1913-1939; Pinheiro (1997), 19501952; IMF, 1953 onwards
Spain
1850-1855, Tortella (1982), currency in circulation, and Tedde (1999), notes in
circulation. 1856-1873, Banco de España (1970), currency outside banks; 1850-1873,
Martín-Aceña and Pons (2005), demand deposits; Time and savings deposits: (Tortella
1985) deposits estimates less sight deposits in private banks, from Martín-Aceña and
Pons (2005), provide an estimate of time deposits, to which I added non-banking
savings deposits from Titos (1999). Money supply and its components: Tortella (1974),
1874-1899; Martín-Aceña (1985), 1900-1935; Martín-Aceña (1988), 1950-1962;
Martín-Aceña and Pons (2005), 1963 onwards.
Sweden
Mitchell (2008), 1850-1870; Edvisson (2011), 1871-1980; Statistics Sweden, 1981
onwards
Switzerland
Historical Statistics of Switzerland, 1851-1905, In the absence of data on time and
savings deposits, it was assumed that it moved along demand deposits, so the level of
71
total deposits in 1906 was backwards projected with the data on demand deposits;
Mitchell (2008), 1906-1939; IMF, 1950 onwards.
United Kingdom
Currency outside banks, 1850-1870, Mitchell (1988), coin level for 1870 was backwards
projected with Huffman and Lothian (1980) figures and added up to Mitchell (2008)
banknotes in circulation. 1871-1981, Capie and Webber (1985); from 1982 onwards,
Hills et al. (2010). 1850-1870, Collins (1983), demand deposits; Mitchell (1988, 2008),
savings deposits. 1871-1981, Capie and Webber (1985), all deposits; 1982-2007, Hills
et al. (2010), all deposits. Pre-1982 figures were adjusted to match the level of 1982
derived from data in Hills et al. (2010).
Currency outside banks, 1850-1870. Two alternative estimates were derived and its
average taken. On the one hand, Mitchell (1988), coin level for 1870 was backwards
projected with Huffman and Lothian (1980) figures and added up to Mitchell (2008)
banknotes in circulation. On the other, Hills et al. (2010) currency outside banks in
1870 was projected backwards with Huffman and Lothian (1980) total figures for coin
and notes outside banks. 1871-1981, the average of estimates by Hills et al. (2010) and
by Capie and Webber (1985) was used. From 1982 onwards, Hills et al. (2010) was
employed. All deposits, 1850-1870: Collins (1983), demand deposits (derived from net
public liabilities of commercial banks, which include notes and deposits); and Mitchell
(1988, 2008), savings deposits. All deposits: 1871-1981, Capie and Webber (1985);
1982-2007, Hills et al. (2010). Pre-1982 figures were adjusted to match the level of
1982 derived from data in Hills et al. (2010).
United States
1850-1866, Anderson (2003), currency outside banks derived by projecting its level in
1867 backwards with the series of all notes and coin; figures for all deposits obtained
by projecting backwards Anderson (2003) level for 1867 with the series of deposits
provided by Mitchell (2008); Anderson (2003), 1867-1939; IMF, 1950-1959; IHS_Global
Insight, 1959-2005; Federal Insurance Deposit Corporation, 2006-2007
72
Money
A) Inflation Rate
The consumer price index (CPI) has been used as the measure of inflation for
this component. When the CPI was unavailable, the implicit GDP deflator was used.
B) Standard Inflation Variability during the last five years
The GDP deflator was used as the measure of inflation for this component.
When unavailable, the CPI was used.
C) Money Growth Differential
Derived as the average annual growth of the money supply in the last five years
minus the average annual growth of real GDP in the last ten years. M1 figures were
used to measure the growth rate of the money supply.
The sources used are,
Australia
CPI, Mitchell (2008), 1861-1870; Maddison (1991), 1870-1939; IMF, 1950-2007
GDP deflator derived from current GDP, Vamplew (1987), and real GDP in Maddison
(2010), up to 1960; and Australian System of National Accounts, 1960 onwards.
Real GDP, Maddison (2010)
Austria
CPI, Maddison (1991), 1875-1939; IMF, 1950 onwards
GDP deflator, derived from nominal GDP, Mitchell (2008), 1925-1937, and IMF, 1950
onwards, and real GDP, Maddison (2010)
Real GDP, Schulze (1997), up to 1913; Maddison (2010) thereafter
Belgium
CPI, Maddison (1991), 1850-1939; IMF, 1950 onwards
GDP deflator, 1850-1913, Horlings (1997); 1925-1939, average of Buyst (1997), income
and expenditure, and Horlings (1997), output deflators; IMF, 1950 onwards
Real GDP, 1850-1913, Horlings (1997); 1925-1939, average of Buyst (1997), income
and expenditure, and Horlings (1997), output; Maddison (2010) thereafter
Canada
CPI, Maddison (1991), 1870-1939; IMF, 1950 onwards
73
GDP deflator, Urquhart (1993), 1870-1939; IMF, from 1950 onwards
Real GDP, Urquhart (1993), 1870-1939; Maddison (2010) thereafter
Denmark
CPI, Mitchell (2008), 1850-1870; Maddison (1991), 1870-1939; IMF, 1950 onwards
GDP deflator, Derived from current GDP, Hansen (1974), 1850-1939 and IMF, 1950
onwards, and real GDP from Maddison (2010).
Real GDP, Maddison (2010)
Finland
CPI, Heikkinen (1997), 1850-1913; Hjerppe (1996), 1913-1939; IMF, 1950 onwards
GDP deflator, derived from current GDP Hjerppe (1996), 1860-1974, and IMF, 1975
onwards, and real GDP, Maddison (2010).
Real GDP, Maddison (2010)
France
CPI, Lévy-Leboyer and Bourguignon (1985), 1850-1913; Maddison (1991), 1913-1950;
IMF, 1950 onwards
GDP deflator, Toutain (1997), 1850-1962; IMF, 1963 onwards
Real GDP, Toutain (1997) and Maddison (2010)
Germany
CPI, Mitchell (2008), 1850-1870; Maddison (1991), 1870-1939; IMF, 1950-1993;
DeStatis www.destatis.de, 1993 onwards
GDP deflator, Ritschl and Spoerer (1997), 1901-1939; CPDS, 1960 onwards
Real GDP Burhop and Wolff (2005), 1851-1913; Ritschl and Spoerer (1997), 1913-1950
Greece
CPI, Mitchell (2008), 1914-1939; IMF, 1950 onwards
GDP deflator, Kostelenos et al. (2007), 1850-1937;UN (1950), 1937-1939; IMF, 1950
onwards
Real GDP from Kostelenos et al. (2007), 1850-1939; IMF, 1950 onwards
Ireland
CPI, Mitchell (2008), 1925-1939; IMF, 1950 onwards
GDP deflator, IMF, 1950 onwards
Real GDP, Mitchell (1988), 1926-1938; and IMF, 1950 onwards
74
Italy
CPI, ISTAT
GDP deflator, Baffigi (2011)
Real GDP, Baffigi (2011)
Japan
CPI, Maddison (1991), 1879-1939; IMF, 1950 onwards
GDP deflator, derived from nominal GDP, Ohkawa and Shinohara (1979), 1885-1951,
and IMF, 1951-1955, and real GDP (Maddison 2010), 1885-1955; Historical Statistics
Japan, 1955 onwards
Real GDP, Maddison (2010)
Netherlands
CPI, Maddison (1991), 1870-1939; IMF, 1950 onwards
GDP deflator, Smits et al. (2000), 1850-1913; den Bakker et al. (1990), 1925-1939; IMF,
1950-2001; Statistics Netherlands, 2002 onwards
New Zealand
CPI, Statistics New Zealand, 1857-2004; IMF, 2004 onwards
GDP deflator, Statistics New Zealand, 1860-2000; IMF, 2001 onwards
Real GDP, Statistics New Zealand, 1860-2004; Maddison (2010) thereafter
Norway
CPI, Grytten (2004a) updated
GDP deflator, Grytten (2004b) updated
Real GDP, Grytten (2004b) updated.
Portugal
CPI, Valério (2001), 1850-1939; IMF, 1950 onwards
GDP deflator, Lains (2003), 1850-1910; Batista et al. (1997), 1910-1953; Pinheiro
(1997), 1953 onwards
Real GDP from Lains (2003), 1850-1910; Batista et al. (1997), 1910-1953; Pinheiro
(1997), 1953 onwards
Spain
CPI, Maluquer de Motes (2005, 2006), 1850-2001; INE, http://www.ine.es/, 2001
onwards
GDP deflator and Real GDP, Prados de la Escosura (2003, updated)
75
Sweden
CPI, Edvinsson and Söderberg (2007), 1850-2006; Statistics_Sweden, 2007
GDP deflator, Schön and Krantz (2012)
Real GDP from Schön and Krantz (2012)
Switzerland
CPI, Historical Statistics Switzerland, 1850-2005; IMF, 2006-2007
GDP deflator, Historical Statistics Switzerland, 1851-2001; IMF, 2001 onwards
Real GDP, Historical Statistics Switzerland
United Kingdom
CPI, Hills et al. (2010)
GDP deflator, Hills et al. (2010)
Real GDP from Hills et al. (2010)
United States
CPI, Officer and Williamson (2013)
GDP deflator, Williamson (2013)
Real GDP from Williamson (2013)
Freedom to Trade Internationally
A ) Customs revenues as a percentage of the current value of imports
Mitchell (2008) World Bank (2013) for the post-1970 era, were complemented, when
necessary, with national sources.
Australia
Vamplew (1987), 1850-1900; Mitchell (2008), 1900Austria
Trade, crude computations from data on the share of Imperial Austria in AustriaHungary trade derived from Eddie (1980) for 1880-1913 and extended back to 1850.
Eddie (1980) provides Imperial Austria’s share in Austria-Hungary trade and, therefore,
trade by Imperial Austria can be derived, which includes re-exports to and from
Hungary. Eddie presents shares of Austria in Hungary’s trade, so Austrian trade with
the rest of the World can easily be computed. A difficulty appears as regards the share
of Austrian trade with Hungary that represents domestic exports and retained or net
imports and not just re-exports. Given the lack of information, I decided to consider re76
exports negligible and to attribute all the trade between Imperial Austria and Hungary
to domestic exports and retained imports. The computed share of Austria in AustriaHungary trade for 1880 was applied to trade figures for Dual Monarchy in earlier years
in order to derive Austrian exports and imports back to 1850
Canada
Williamson (private communication), Customs revenue to imports ratio re-scaled to
customs revenues/exports + imports with imports to exports and imports ratio in
1868, from Mitchell (2008), 1865-1867.
France
Customs revenues, Mitchell (2008); exports and imports, Lévy-Leboyer (1977), 18501913; Mitchell (1993, 2005), 1914-1939
Germany
Williamson (private communication), Customs revenue to imports ratio re-scaled to
customs revenues/exports + imports with imports to commodity trade ratio in 1880,
from Mitchell (2008), 1865-1879.
Greece
Williamson (private communication), Customs revenue to imports ratio re-scaled to
customs revenues/exports + imports with imports to commodity trade ratio from
Mitchell (2008).
Japan
Williamson (private communication), Customs revenue to imports ratio re-scaled to
customs revenues/exports + imports with imports to commodity trade ratio from
Mitchell (2008), 1865-1867.
Netherlands
Smits et al. (2000), 1850-1913; 1925-1939, customs revenues, Mitchell 2008); exports
and imports, den Bakker et al. (1990).
New Zealand
Customs revenues, Mitchell (2008); exports and imports, Statistics New Zealand
Portugal
Lains (1995) and Valério (2001)
Spain
Tena (2005)
77
B) Trade restrictions from 1950 onwards
For the post-1950 period, Quinn and Todoya (2008) provide institutional
settings (de jure) measures of liberalization of financial current account restrictions
that capture trade restrictions. In particular, “how compliant a government is with its
obligations under the IMF’s Article VIII to free from government restriction the
proceeds from international trade of goods and services” (Quinn and Toyoda 2008:
1409). The index contemplates commodity and services trade and ranges from 0 to 8
(full compliance) that the authors transformed into a 0-100 scale.
C) Difference between official exchange rate and black-market rate
The Black Market Premium (BMP) is the difference between the official and the
parallel market exchange rate. Data for all countries come from Reinhart and Rogoff
(2003, 2004) database since 1946 except for Spain, for which a weighted measure from
Prados de la Escosura et al. (2012) has been used.
D) International capital market controls
For the pre-1939 period I have built an index of capital mobility that assigns
values over a 0-10 range to each country, depending on its currency convertibility (see
the main text). The values assigned in this exploratory exercise are, unfortunately,
largely discretional.
Data for most countries come from Flandreau and Zumer (2004), completed
with my own estimates built on the basis of data in Bordo and Schwartz (1996),
Eichengreen (1992), Eichengreen and Flandreau (1996), the League of Nations (19251939), and Reinhart and Rogoff (2003, 2004, 2010).
For the post-1950 period, Quinn and Todoya (2008) provide institutional
settings (de jure) measures of liberalization of capital account controls up to 2004 that,
lacking data, I have assumed remained unaltered up to 2007. This indicator ranges
from 0 to 4 (full openness) that the authors transformed into a 0-100 scale.
Regulation of Credit, Labour, and Business
A) Credit market regulation: 1) interest rate controls
I transformed the original values of the real interest rate into index form using
upper and lower bounds of 20 and -20 per cent. It is worth noting that in the
78
computation of real interest rates, negative rates of inflation have previously been
made equal to zero since the real interest rates that would result under negative
inflation would exaggerate the measure of freedom of credit regulation. This decision
is consistent with the view that price stability is what guarantees economic freedom.
Data on short-run interest rates come from Homer and Sylla (2005) and IMF, from
1950 onwards, unless expressed explicitly in each country sources. Inflation rates from
the sources used for Sound Money.
The sources used are,
Australia
Vamplew (1987), 1850-1936; Homer and Sylla (2005), 1937-1968; IMF, 1969-2007
Austria
Flandreau and Zumer (2004), 1876-1913; Morys (private communication), 1925-1939;
IMF, 1950 onwards
Belgium
Homer and Sylla (2005), 1850-1939; IMF, 1950 onwards
Canada
1871-1939, McInnis (2001); Homer and Sylla (2005), 1950-1989; IMF, 1990 onwards
Denmark
Abildgren (2005), 1875-2003; IMF, 2004 onwards
Finland
Bank of Finland, 1867-1939; IMF, 1950 onwards
France
Lévy-Leboyer and Bourguignon (1985), 1850-1862; Homer and Sylla (2005), 1863-1939;
IMF, 1950 onwards
Germany
Homer and Sylla (2005), 1850-1913, 1925-1939; IMF, 1950 onwards
Greece
SEEMNH (2009), 1850-1869; Flandreau and Zumer (2004), 1870-1913; Lazaretou
(2008), 1928-1939; IMF, 1950 onwards
Ireland
Hills et al. (2010), Bank of England rated accepted in the absence of information about
Ireland, 1925-1939; IMF, 1950 onwards
79
Italy
De Bonis et al. (2012)
Japan
Homer and Sylla (2005), 1883-1939; Historical Statistics Japan, 1950-2000; IMF, 2001
onwards
Netherlands
Homer and Sylla (2005), 1850-1954; IMF, 1955 onwards
New Zealand
Homer and Sylla (2005), 1934-1939; Statistics New Zealand, 1950-2003; IMF, 2004
onwards; the level for 1934 was backwards projected to 1859 with Australia’s series.
Norway
Eitrheim et al. (2007)
Portugal
Reis (2007), 1863-1887; Flandreau and Zumer (2004), 1888-1890; Valério (2001) and
Pinheiro (1997), 1891-1998; IMF, 1999 onwards
Spain
1850-1873, Tortella (1973), Banco de Barcelona; 1874-2000, Martín-Aceña and Pons
(2005); Banco de España, 2001 onwards
Sweden
Homer and Sylla (2005), 1850-1855; Waldeström (2007), 1856 onwards
Switzerland
Swiss National Bank, Lombard rates up to 1906
United Kingdom
Hills et al. (2010)
United States
Officer (2013)
A) Credit market regulation: 2) Budget Balance (% GDP)
The data come from Mauro, P., R. Romeu, A. Binder, and A. Zaman (2013), except for
Portugal, from Marinheiro (2006), and Spain, Comín (2005), private communication.
80
B) Labour market regulation
The OECD (2008) aggregate index of employment protection legislation for
1985-2008 (OECD 2008) has been extended back to 1950 with estimates in Crafts
(2006) and Allard (2004).
81
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